By Sarah Borchersen-Keto, CCH Washington News Bureau, Contributing Author, the CCH Federal Banking Law Reporter and Bank Digest
FDIC Director Thomas Hoenig called for narrowing the financial safety net to where it is most needed and stopping the extension of its subsidy to an ever-greater number of firms and activities. Speaking Nov. 30, 2012, before the AICPA/SIFMA FSA National Conference in New York, N.Y., Hoenig said the safety net “continues to expand to cover activities and enterprises it was not intended to protect, resulting in subsidized risk taking by the largest financial firms and fueling their leverage.”
Narrowing the safety net, limiting its coverage and realigning incentives must be among the highest priorities following the financial crisis, Hoenig asserted. He added that governments “would be wise to limit commercial banking activities to primarily those for which the safety net's protection was intended: stabilizing the payments system and the intermediation process between short-term lenders and long-term borrowers.” Hoenig proposed, as an alternative to “the unmanageably complex Basel risk-weighted standards,” a system whereby banks hold a tangible-equity-to-tangible-asset ratio of 10 percent. He noted that such a change would offer global supervisors a “clear benchmark” to test against and enforce a minimum level. He also called for reestablishing a more rigorous examination program for the largest banks and bank holding companies in order to best understand the risk profile of both individual firms and financial markets.