Thomas Hoenig, vice-chairman of the FDIC, says that coming calls to streamline federal bank regulation are misguided, and that the real problem is that banks are still too big, and rely too much on the government to cover their losses:
[I]t is concerning to learn of a renewed effort to change the regulatory structure, but not the structure regulated, which contributed so importantly to the crisis. Some CEOs of the largest banking firms and their lobbyists have pleaded that there are too many supervisors. They often show a spider web-like chart that they say demonstrates the complexity and inefficiency of the regulatory structure. While I suspect a set of recommendations giving these companies what they want will be announced soon, adopting them will not strengthen the system and would distract from the real issues needing attention.
[T]he regulatory agency structure is hardly more complex or confusing than that of the firms and the activities being supervised. The financial industry with government-supported risk taking has been permitted to increase to a size and level of complexity that has become unmanageable; where weak controls failed to prevent recurring violations of laws and where outsized risks resulted in weak balance sheets and massive failures and bailouts. [Emph. added]
This is almost entirely wrong-headed. First, complexity of federal bank regulation, which Hoenig seems to admire so, isn’t the result of some grand design cooked up by all-knowing bureauacrats. Rather, it’s there because it’s built up over time. The OCC was created in 1863. Next came the Fed, in 1913. The FDIC and S.E.C. happened in the early 1930’s. And the CFPB and Financial Services Oversight Council were created in 2011. Each time, a new bureaucracy was layered on top of an existing one, and the result is a semi-haphazard regulatory structure full of rivalries and antagonisms that’s often at odds with itself. As for the institutions those agencies oversee, they are demonstrably less complex than they once were (if you doubt it, read Jamie Dimon’s new letter to shareholders), more strongly capitalized, and less likely than at any time in memory to need support from the government. It is as if Hoenig is actively delusional:
[T]he real issues to be addressed are the complexity of the firms supervised and the quality of the supervisory process. Almost certainly the demands for bank supervision are going to increase as governments, rather than private capital, serve as the backstop protecting depositors and creditors from loss should a bank fail. The incentives to take advantage of this public backstop — that is, to operate with too little capital and to engage in hedge-fund like activities without all creditors sharing the risk — overwhelm the market’s ability to discipline these players. To mitigate this effect there needs to be emphasis on better supervision.
Has Hoenig missed the last five years? It is (and always has been) banks’ private capital, not the government, that serves as the primary “backstop protecting depositors”—and banks have more of capital to use as a backstop than ever. And, no, banks don’t engage in “hedge-fund like activities.” For better or worse, the Volcker rule put a stop to that. Hoenig is complaining about an industry that doesn’t exist anymore.
Thomas Hoenig is one of those lifetime Washington bureaucrats who seems to have come to believe in the omniscience of lifetime Washington bureaucrats. He apparently thinks that the ramshackle structure of federal bank regulation is perfectly suited to the task, and that the bureaucrats that populate those agencies will always know better than the people who work for the banks they oversee. Instead, the real wrongdoers in Hoenigs mind are the banks themselves. No matter how many new rules have been imposed on banks lately, no matter how much redundant capital banks have been forced to add, and no matter how far banks go in simplifying their businesses, it’s still not enough. In Hoenig’s eyes, it never will be.
I’m all for rational, prudent regulation of the banking industry—and so is every bank CEO I know. Still, bank regulation can have a pretty awful reputation sometimes, and bank regulators are too often seen as clueless, paper-pushing plodders. Thomas Hoenig reinforces that impression.
What do you think? Let me know!