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FDIC Vice-Chairman Hoenig Proposes Bank Separation

March 13, 2017 (EIRNS)—Called a "plan to modernize Glass-Steagall" by American Banker and a "throwback to the 1933 Glass-Steagall Act" by Washington Examiner, Federal Deposit Insurance Corpation Vice-Chair Thomas Hoenig’s speech to the Institute of International Bankers in Washington, D.C., today, was really a much simpler proposal to adopt one element of Glass-Steagall, although a significant one.

Hoenig himself said, "The proposal would not reduce the ability of a universal bank to conduct any of its current [including speculative] portfolio of activities." But only the commercial bank unit’s deposits could be insured by taxpayers through the FDIC. He proposed that U.S. financial firms should partition their investment banking activity, putting all those units into a separate, intermediate holding company with its own board and management and its own capital. That holding company would not have access to FDIC insurance.

The second part of Hoenig’s proposal requires all bank holding companies to have a tangible capital equal to 10% of all (not risk-weighted) assets, including the total value-at-risk of their derivatives exposure. If they were unable to do this they would have to be broken up, and this level is roughly double the capital ratio (half the leverage) which the Wall Street megabanks have, at best.

Hoenig proposed to accompany this with the removal of a large number of Dodd-Frank regulations; and said he had briefed the leaders of the House Financial Services Committee and Senate Banking Committee on the proposal before making it public.

Bloomberg News noted that "President Trump has worried Wall Street by promising to bring back a version of the Glass-Steagall Act. Hoenig told reporters after the speech, that his plan, which would require new legislation, wouldn’t bring Glass-Steagall back, but could meet the Trump Administration’s goal of enacting a modern form.