Big banks are government-backed: Fed's Hoenig

CHARLOTTE, North Carolina Tue Apr 12, 2011 2:21pm EDT

CHARLOTTE, North Carolina (Reuters) - Big banks like Bank of America Corp (BAC.N) and Citigroup Inc (C.N) should be reclassified as government-sponsored entities and have their activities restricted, a senior Fed official said on Tuesday.

The 2008 bank bailouts at the height of the financial crisis and other implicit guarantees effectively make the largest U.S. banks government-guaranteed enterprises, like mortgage finance companies Fannie Mae and Freddie Mac, said Kansas City Fed President Thomas Hoenig.

"That's what they are," Hoenig said at the National Association of Attorneys General 2011 conference.

He said these lenders should be restricted to commercial banking activities, advocating a policy that existed for decades barring banks from engaging in investment banking activities.

"You're a public utility, for crying out loud," he said.

The Kansas City Fed president has been a vocal critic of rescuing the biggest banks rather than allowing them to fail. He has criticized the Fed's easy money policies in the wake of the crisis.

There are slim chances his proposal to classify banks as government-guaranteed enterprises would be adopted. Eighteen out of the 19 biggest U.S. banks have repaid 2008 bailout aid, removing most government investment over the last 18 months.

In a later session, Bank of America Chief Executive Brian Moynihan rejected the notion that the largest banks should divorce their commercial and investment banking operations.

"I think customers want it together," said Moynihan, noting he sees the combination as necessary to effectively serve large American companies with global operations.

The longest serving Fed bank president, Hoenig began his career in the Fed system in 1973 as an economist in the bank supervision group. The anti-inflation hawk will step down as president of the Kansas City Fed in October.

Hoenig's experiences shuttering banks during the savings and loan crisis of the 1980s, when over-investment in real estate caused hundreds of bank failures and necessitated a massive government bailout, shaped his views about how to emerge from the most recent crisis.

Hoenig also said banks are still not adequately prepared for the next financial crisis, despite new capital rules requiring lenders to raise billions of dollars to buttress against future losses.

Hoenig said the proposed Basel III capital requirements -- which demand as much as 8 percent core capital ratio -- will not be enough to weather catastrophic losses.

"That is far too little capital with this complexity and this risk profile," he said.

(Reporting by Joe Rauch; Editing by Tim Dobbyn, Matthew Lewis and Andrew Hay)

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Comments (2)
At last, someone has spoken out about the banking industry. Please begin a dialogue that will bring this to the forefront of the coming economic discussion. There is no reason for banks to refuse to lend to people who have money, which they are doing right now. Mortgages are being denied to people with plenty of money. In Indianapolis a builder with a great reputation is going out of business because he cannot get a loan. There is something radically wrong. And it all comes down to government.

Apr 12, 2011 3:39pm EDT  --  Report as abuse
ahouse1 wrote:
Couldn’t agree more. That being said somebody is going to have to pay for the rules that have been broken or ignored to this point. The due diligence that needs to be done to evidence the issues will only occur if every affected Homeowner asks the banks for the accounting. please let us help you evidence the bureaucratic discrimination that is still occurring … http://diligencegroupllc.net

Apr 13, 2011 3:37pm EDT  --  Report as abuse
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