by Kyle Colona on August 3, 2012
While Sandy Weill’s recent remarks calling for big banks to be split up created waves of chatter on The Street, FDIC board member and former head of the Kansas City Federal Reserve Bank Tom Hoenig has been spearheading the charge to split up the big banks.
Mr. Hoenig has long argued that repealing Glass-Steagall made the financial crisis of 2008 more severe. In a recent interview with the Kansas City Star, he also said that “as comprehensive as Dodd-Frank was, more needs to be done.”
Hoenig restated those views this week on CNBC’s Squawk Box program, the very same perch from where Mr. Weill joined the split up the banks debate about two weeks ago. But the question remains as to why attention is suddenly being paid to the idea of resurrecting the wall between commercial and investment banking.
That wall was torn down when outgoing President Bill Clinton signed the Graham-Leach Bliley legislation in 1999 that repealed Glass-Steagall. The law also created the Federal Deposit Insurance Corporation. So it is a bit ironic that one of the chief architects of the “one stop banking” model has done an about face by calling for the wall to be rebuilt.
And now, more than a decade later, the damage to the financial system continues to impede a global economic recovery.
Mr. Hoenig argues for separating traditional commercial banking, which is the business of taking deposits and making loans, from investment banking, which involves securities markets and trading. And the overarching problem of the financial tsunami was the ability of financial giants that acted as both a traditional bank and an investment bank to tap the government safety net to finance riskier securities activities.
The safety net included FDIC insurance, the TARP program as well as the various lending programs put into place by the Federal Reserve. And the guarantees, or subsidies, created what many call a “moral hazard” that pushed banks to make riskier investments like swap transactions to compensate for low interest rates being offered by the Fed.
And in case anyone has failed to notice, the Federal Reserve continues to keep interest rates extremely low as banks assume more risk in search of greater returns. Could it be that this was the driving force that led JP Morgan Chase to its whale of a blunder in the synthetic credit securities market?
While the debate about how to handle too big to fail banks will continue, and the much harrumphed Dodd-Frank law was designed to address this problem, it appears that the breaking up the big banks notion is turning in the favor of proponents like Mr. Hoenig.
Want a daily digest of articles like this one, plus the latest compliance jobs at top-tier organizations? Join 50,000 other compliance, risk governance, and regulatory professionals and subscribe to our free afternoon newsletter. Where do you find news, style, and career all in one place? The Executive Gateway, our new lifestyle magazine.
Kyle Colona is a New York-based freelance writer and a Feature Writer for CompliancEX and the Wall Street Job Report. He has an extensive background in legal and regulatory affairs in the financial services sector and his work has appeared in a variety of print and on-line publications. You can find him on linkedin.