Fed’s Hoenig: Reform to hit smaller banks

KANSAS City Federal Reserve Bank President Thomas Hoenig warned yesterday that landmark financial reforms may not end market perceptions that taxpayers will rescue the largest banks and cautioned against speculative investments in housing.

Hoenig, testifying at a field hearing of the US House of Representatives Subcommittee on Oversight and Investigations, said larger banks perceived as “too big to fail” have a lower cost of capital, putting smaller banks at a competitive disadvantage and threatening their business model.

The Dodd-Frank Wall Street Reform and Consumer Protection Act intended to end Wall Street bailouts by giving regulators a mechanism to seize and shut down failing large institutions in much the same manner as the Federal Deposit Insurance Corp can shut down smaller banks.

Hoenig said it was not yet clear whether the reform act would put big and small banks on an equal footing.

“That can only happen if markets are absolutely convinced that too big to fail has finally been ended and only time will tell. It’s an open question,” he told the hearing.

Hoenig, the Fed’s lone policy dissenter in recent months, did not address the US central bank’s outlook on the economy nor monetary policy matters. He voted against the Fed’s decision earlier this month to reinvest funds from maturing mortgage-backed securities into Treasury debt to help push down mortgage interest rates further, citing a gradual improvement in the economy.

He also told the House panel that housing was not suitable for speculative investments by consumers.