The Volcker Rule ban on banks’ proprietary trading is a “useful” step that may spur efforts to split commercial lenders from broker-dealers, Federal Deposit Insurance Corp. Vice Chairman Thomas Hoenig said today.
“I don’t necessarily think it will stop the momentum, especially if it’s successful and helps mitigate some of the surprises we’ve had,” Hoenig told reporters after a speech in Dublin. “It may in fact make a very good case for carrying that forward in terms of some of the risks that are still in market-making that can be gamed very easily for speculative activity.”
Hoenig, who served as a Federal Reserve Bank president before joining the FDIC, has called for a new version of the Glass-Steagall Act, which separated commercial and investment banking before it was repealed in 1999. Restoring that separation could help reverse an evolution that has seen the five largest U.S. financial companies increase their share of industry assets to 55 percent from 20 percent, Hoenig, 67, said in the speech at the Institute of International and European Affairs.
“The constant drum beat of scandal and mediocre performance of the past half-decade suggests that some financial firms have reached that point where they are too large and complicated to be led successfully,” he said.
The six biggest U.S. banks, led by New York-based JPMorgan Chase & Co. and Bank of America Corp. of Charlotte, North Carolina, have piled up more than $100 billion in legal costs since the credit crisis. Lenders have faced accusations of manipulating markets for credit derivatives, rigging interest rates used to price loans worldwide and misleading investors in mortgage-backed securities.
There’s “increasing evidence” that the biggest firms -- controlling trillions of dollars, running thousands of subsidiaries and employing hundreds of thousands -- would benefit from being split up, Hoenig said. Individuals in the large banks can “too easily circumvent overly complex and centralized controls,” he said.
Hoenig has argued for more than a year that the trading ban required by the Dodd-Frank Act of 2010 would be insufficient and that an implicit government safety net would still cover swaps trading and market-making, “much of which could become veiled prop-trading.”
Senator Elizabeth Warren, a Massachusetts Democrat, said in a Bloomberg Television interview yesterday that she is “still pushing for Glass-Steagall,” even if Volcker was an “important step.” Warren and Senator John McCain, an Arizona Republican, have pushed a new version of the Depression-era law.