Executive Intelligence Review


Hoenig and Bair Warn Fed Is Letting Banks Bring on Collapse Again

April 30, 2018 (EIRNS)—Writing in Wall Street Journal April 26, outgoing FDIC Vice-Chairman Thomas Hoenig and former FDIC Chair Sheila Bair warned against the Federal Reserve plan to lower the biggest banks’ capital requirements, saying this risk model “failed to predict the 2008 collapse” and will do so again.

Hoenig and Bair wrote that, inevitably, the biggest bank holding companies will use the capital they no longer have to hold, under the Fed’s rule changes, to pay dividends or to invest in trading/broker-dealer speculation, not lending.

In 2004 investment banks were disastrously allowed to leverage themselves up to a debt-to-capital ratio of 30:1. As a result, Lehman, for example, was leveraged 38:1 by the time it failed and triggered general bank panic.

“America’s biggest banks are among the most leveraged financial institutions operating in the country today,” they wrote.

“They are permitted to finance lending and other activities with 94 cents debt and only about 6 cents of tangible equity for every dollar in assets. Their profits are breaking records—for some, soaring 35% to an all-time high.... Therefore it concerns us that the Federal Reserve and the Office of the Comptroller of the Currency are weighing proposals that would permit further increases in bank leverage....

“The idea that lowering bank capital requirements boosts lending is urban legend. Ample research shows that banks with higher capital levels lend more, not less, through business cycles....

“Recall that at the start of the 2008 crisis the largest U.S. banks had tangible equity to assets of about 3%, or 97 cents of debt for every dollar of assets. They lost double their equity, and required trillions of dollars in liquidity and other assistance backed by taxpayers to bail them out and stabilize the economy. During that time their ability to lend fell as the threat of insolvency rose.”