Since the end of the financial crisis, US banks have had to improve their capital structures, but that doesn’t mean they aren’t still incredibly leveraged. In a recent interview with Fortune contributor Eleanor Bloxham, Federal Insurance Deposit Corp (FDIC) vice chair Tom Hoenig said that he is still worried about taxpayers’ exposure to banks risky positions.
Hoenig sees problems with Dodd-Frank Title 1 and 2
Hoenig says in the interview that some positive steps have been taken, such as increasing the leverage ratio from 3% to 5% for bank holding companies and 6% for banks and the implementation of the Volcker Rule, but he doesn’t think that these reforms go far enough. He specifies that Dodd-Frank Title 1, which is supposed to make banks resolvable in bankruptcy, still needs a lot of work to be useful in a crisis while Title 2 uses the government to backstop the process. While the legislation is meant to prevent another round of bailouts in a future recession, this is already a sort of soft bailout which opens the door to more government intervention.
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He also draws a parallel between the collateralized debt obligations (CDOs) that got banks in trouble during the financial crisis and the collateralized loan obligations (CLOs) that are currently on their books and high risk leveraged loans. At this point, the notional value of derivatives has gone even higher than it was before the financial crisis.
“If we were to have a decline in the economy, taxpayers could still be exposed to the need for government intervention. It’s a concern I have and the public should have as well,” said Hoenig.
Megacap banks: Hoenig rejects ‘commissioned studies’ that dispute too big to fail subsidies
In the interview, Hoenig also took issue with research suggesting that megacap banks don’t receive a subsidy in the form of an implicit government guarantee. The argument is that creditors are willing to extend cheaper financing to huge banks because they don’t believe the US government can allow them to fail. This, in turn, allows the big banks to undercut smaller competitors and drives banking consolidation.
“We have numerous studies on ‘too big to fail’ subsidies,” says Hoenig. “These studies come from academics, from the IMF, and the OECD, and they systematically show big banks do receive subsidies. The findings stand in contrast to what you’ll find in the commissioned studies.”