Fed Official Says 'Too Big to Fail' Threatens Community Banks

Thomas Hoenig, president of the Kansas City Federal Reserve Bank, said Monday, August 23, that the long-term health of community banks was being strangled by the market’s, and the government’s, policy of “too big to fail” toward big banks.

Hoenig, in prepared testimony to a field hearing of the U.S. House of Representatives Subcommittee on Oversight and Investigations in Overland Park, Kansas, said that in the near term the model used by community banks was still viable if allowed to compete on an even playing field with big banks.

“Community banks will survive the recession and will continue to play their role as the economy recovers,” Hoenig said. “The more lasting threat to their survival, however, concerns whether this model will continue to be placed at a competitive disadvantage to larger banks. Because the market has perceived the largest banks as being too big to fail, they have the advantage of running their business with a greater level of leverage and a lower cost of capital and debt.”

Hoenig, at the Federal Open Market Committee’s meeting on August 10, was the lone dissenter of the Fed’s policy to maintain low interest rates for an extended period because the economy was recovering modestly as expected, he said.