Fed's Hoenig: private sector has to "step up"

By Alister Bull

WASHINGTON (Reuters) - Kansas City Federal Reserve Bank President Thomas Hoenig said on Monday the financial crisis demands that banks "step up" and resume lending to each other.

"(It) is for the financial industry itself to step up and lead through this. I don't think we can do it with just (the) Federal Reserve and the Treasury," Hoenig told the Institute of International Bankers.

"We need our 21st Century J.P. Morgans who helped with the crisis almost 100 years...I think the financial industry has to come together and say how can we solve this ourselves. Because if it doesn't, the credit can't be released, no matter what steps we might take," said Hoenig.

He is not a voting member of the Fed's interest-rate setting committee this year.

Exorbitant executive pay on Wall Street has enraged ordinary Americans now stuck with a $700 billion to bail them out and Hoenig said that it was an "anathema" to allow the chief of a failed firm to walk away with his pockets full.

"Let's think it through and see if we can design something that makes sense," he said. Hasty legislation could have bad unintended consequences, but Hoenig said that he would be in favor of measures that navigated through those dangers.

The U.S. Treasury has been given the power to spend up to $700 billion of taxpayers money to invest in U.S. banks to replace capital lost in the mortgage market meltdown. Among the issues it is working through is that of executive pay.

A challenge for regulators going forward will be to review capital requirements, such as those proposed under so-called Basel bank standards.

"Basel II was 10 years in the making and I'm sure with this crisis it will have to be revised," he said.

RULES

Rules-based supervisory structures are more effective than ones built on principles, Hoenig said.

"Principles-based solutions usually become vague, they're subject to volumes of regulatory interpretation," he said. Such a structure tends to be stricter in lean times and looser in boom periods, rather than smoothing out extremes, he added.

He also urged that greater scrutiny of leverage levels within individual institutions be increased and argued that these were easier to understand than the risk-weighted capital approach of Basel.

Hoenig, who was a bank supervisor before he took over at the Kansas City Fed, said that experience showed higher levels of leverage were associated with increased probability of problems within a bank or financial institution.

(Writing by Tim Ahmann, Mark Felsenthal and Alister Bull, Editing by Walker Simon)