April 30, 2014 / 5:30 PM / 5 years ago

U.S. FDIC's Hoenig: stress tests no substitute for tough exams

WASHINGTON (Reuters) - A top U.S. financial regulator said on Wednesday that the government should beef up exams of the biggest banks and rely less on annual stress tests to weigh their health.

Thomas Hoenig, vice chairman of the Federal Deposit Insurance Corp (FDIC), made the comments after Bank of America (BAC.N) announced earlier this week that it would have to re-do its test results after discovering a calculation error that led it to overstate its capital levels by about $4 billion.

“Basically, I don’t think you should confine yourself in judging the financial condition of that institution on a stress test. I think you’re subject to lots of mistakes, manipulation and inconsistent outcomes over time,” Hoenig said at the Reuters Financial Regulation Summit.

He said FDIC examiners look through the entire portfolios of small banks during routine checks. For the biggest banks, which are mostly overseen by other regulatory agencies, Hoenig said examiners cannot take such a holistic approach.

“I think they’re simply too big, too complicated to manage, and too big, too complicated to supervise in a systematic fashion,” Hoenig said about the largest U.S. banks, noting that he spoke for himself, not on behalf of the FDIC.

He said regulators could change the exam process to look across big banks, rather than at one segment at a time, to get a better picture of their activities.

“I say if you were to hire more statisticians and maybe fewer econometricians that would then design your sample size for looking at the broad portfolio of these institutions, you would pick up more of those kinds of errors,” Hoenig said.

The Federal Reserve ran health checks on the biggest U.S. banks starting in 2009 to reassure markets that the financial system was not going to collapse during the crisis. Lawmakers codified the program in the 2010 Dodd-Frank law and expanded it so that more firms must complete the tests.

The Fed considers the stress tests one of many tools to oversee banks and ensure their stability, along with tough new capital and liquidity requirements for big firms.

Bank of America’s admission has kept in the spotlight of the debate over whether Wall Street firms are manageable. The bank had to suspend its dividend and its plans to buy back shares until the Fed can approve a new plan.

Comptroller of the Currency Thomas Curry told Reuters on Tuesday that it would take “a lot of work” before Wall Street banks would be simple enough to manage effectively, and that he could not predict when regulators would be confident that enough had been done.

Hoenig has long said he thinks giant firms remain too big. He has argued that they should be divided up along business lines so that banks cannot rely on deposit insurance and other government backstops to support their riskier activities.

On Wednesday, he said stress tests could be included as part of a robust examination program for giant banks but should not be used as a substitute for sophisticated exams.

(Reuters Insider interview with Hoenig: reut.rs/1pP3J2I)

Follow Reuters Summits on Twitter @Reuters_Summits

Reporting by Emily Stephenson; Editing by Karey Van Hall and Sandra Maler

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