Pushback on ‘TBTF’

Propping up banks that are “too big to fail” with taxpayers’ capital doesn’t improve the US financial system or benefit bank customers – it just concentrates more power in the hands of a few giant institutions – Tom Hoenig, president of the Federal Reserve Bank of Kansas City, argues in this week’s Barron’s.

Noting that the 20 largest US banks already own 70% of the banking system’s assets, Hoenig says combining failing banks into bigger institutions only increases that concentration – in turn, further concentrating risk in a few megabanks.

Congress might consider whether the centralization of banking is a good thing as it takes up regulatory reform this fall. At this point, President Obama’s regulatory proposal seems to accept the “TBTF” mantra that has governed US policy so far – proposing to deal with the concentration of risk in megabanks by incrementally increasing their capital requirements, then taking them over after they fail.

Hoenig, the Federal Open Market Committee’s longest-serving member, doesn’t think TBTF is a healthy policy:

“I’ve seen banks close for making mistakes,” says Hoenig. “I’ve seen other banks too big for the regulators, being supported by the U.S. taxpayer. It’s harmful to the infrastructure, and sends the wrong message, that influence is what really matters. If we fail to address ‘too big to-fail,’ it will only get worse.”

Hoenig warns of “an oligarchy of interest” linking megabanks and the Washington power powers-that-be who use government policy to sustain them. Instead, Hoenig advocates more market discipline, decentralization and competition. Now there’s a radical idea for reform. But will it play in Washington?


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