A revival of the Glass-Steagall Act, the Depression-era law that separated commercial and investment banking, is “absolutely necessary” to protect the U.S. financial system, Federal Deposit Insurance Corp board member Thomas Hoenig said in a Bloomberg Radio interview.
Using Dodd-Frank Act powers to break up banks one-by-one is the wrong approach to removing the threat that risky trading could spark a repeat of the 2008 credit crisis, Hoenig said today on “The Hays Advantage” with Kathleen Hays.
“It’s picking winners and losers based on what they present to you, and I think it is fraught with problems,” said Hoenig, who retired as president of the Federal Reserve Bank of Kansas City before joining the FDIC in April.
Dodd-Frank, the regulatory overhaul enacted in response to the worst financial crisis since the 1930s, gives regulators power to force banks to simplify their business if so-called living wills can’t show how they could be unwound in the event of a collapse. Hoenig, 65, said the government should go further, reinstituting the separation that ended when Glass-Steagall was repealed in 1999.
Taking that step would remove government safety nets from the banks’ riskiest investment behavior and “reinvigorate” the U.S. investment banking industry, Hoenig said. Breaking out investment operations in a more total way than Dodd-Frank’s so-called Volcker Rule ban on proprietary trading, will “create a more innovative environment,” he said.
“If we don’t make these changes, I think we’re destined to repeat the mistakes of the past,” Hoenig said. “When you mix commercial banking and high-risk broker-dealer activities, you increase the risk overall and as a result you invite new problems.”
Continuing consolidation of the biggest banks is “a long-term structural issue for banking in the United States” as companies get so big that the government can’t afford to let them fail, Hoenig said. Congress “is going to have to” look at the idea restoring something like Glass-Steagall in order to avert another catastrophe, he said.