FDIC vice chair: Separating commercial, investment banking activities good for lending

FDIC Vice Chairman Thomas Hoenig is optimistic about the state of the U.S. economy, telling the FOX Business Network’s Maria Bartiromo, “Right now the economy is very strong.”

According to Hoenig, a strong banking system is a necessary part of a strong, and growing, economy, but he sees ‘too big to fail’ as still being a risk.

“Well, I think everyone knows that a strong economy requires a strong banking system and if you think of it, today our largest institutions remain ‘too big to fail.’ It’s just a fact, they have. Therefore, taxpayer[s] have to back them up, that’s a subsidy that they receive.”

Hoenig then explained his plan to reorganize large banks to reduce the risks to the U.S. financial system on the economy.

“What I propose is that for the largest organizations, they reorganize themselves around having the insured commercial bank and the broker-dealer capital markets separated under common ownership, but they have separate capital, separate management and they are priced in the market separately.”

Hoenig responded to concerns that higher capital requirements are hurting lending saying, “Research today shows that the better capitalized institutions are better able to lend, and in a downturn, are better able to stay with their customer.”

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Hoenig then pointed to the financial crisis as example, telling Bartiromo, “One thing that happened in the last crisis because they [banks] were so low, so poorly capitalized, is that they had to shrink like crazy and of course the economy suffered dramatically.  What we want to do is prevent that going forward.”

When Bartiromo asked if small community banks should be subject to the same rules as the largest banks, Hoening responded, “No they should not be, but the reason that they are is that these rules are defined around the largest, JPMorgan, so forth.”

But Hoening explained that under the new plan, “You have a more competitive market and everyone is treated at a level playing field.”