December 2, 2010

Fed President Hoenig Eyes Return of Glass-Steagall

Glass-Steagall's separation of banks from more risky brokerage businesses would 'restore the integrity of the financial system'

Federal Reserve Bank of Kansas City President Thomas M. Hoenig called for diversifying the U.S. financial system by bringing back Glass-Steagall-type provisions for financial services giants.

In an Op-ed piece in The New York Times, Hoenig (left), said that, despite Dodd-Frank reforms legislation that was supposed to eliminate bailouts of financial institutions that were deemed “too big to fail,” these institutions have instead grown, using “subsidies they received because they were too big to fail.”

Hoenig adds that "after this round of bailouts, the five largest financial institutions are 20 percent larger than they were before the crisis."

Saying that too much of the financial services system is concentrated in the hands of too few financial institutions, Hoenig calls for the return to Glass-Steagall provisions, which, enacted during the Great Depression, separated banks from brokerage firms. This, in effect, would diversify the risk in the financial services industry, asserting that this would “restore competitive balance to our economic system.”Glass-Steagall was repealed in the mid-1990s, leading to the combination of banks, brokerage firms and sometimes insurance firms, into financial services superpowers.

Taking similar actions today to reduce the scope and size of banks, combined with legislatively mandated debt-to-equity requirements, would restore the integrity of the financial system and enhance equity of access to credit for consumers and businesses,” Hoenig says in the column.

Hoenig has stated before that institutions that are “Too Big to Fail” are a threat to smaller financial institutions like community banks. He has also said that the Fed’s ultra-low interest rate target, 0% to 0.25%, is no longer necessary, and is not a fan of quantitative easing.

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