Hoenig: Restrict bank activities to core services

Below are extracts of a paper formulated by Thomas Hoenig, the President of the Federal Reserve Bank of Kansas City, to better regulate the US Financial sector. His overarching aim is to isolate core banking activities that are protected by a government guarantee from riskier investment banking and trading activities.

“This paper offers a proposal to reduce the costs and risks to the public safety net and financial system and reintroduce accountability by restricting bank activities. The designation of allowable activities is based on the principle that banks should not engage in activities beyond their core services of loans and deposits if those activities disproportionately increase the complexity of banks such that it impedes the ability of the market, bank management, and regulators to assess, monitor, and/or control bank risk taking. Such activities are not essential for conducting the socially valuable core banking activities and lead to unnecessary risk to the safety net and financial system.”

The main regulatory suggestions

  • Impose Volcker Rule. Banking organizations would not be allowed to do any proprietary trading.
  • Allow money market funds to break the buck. “Money market mutual and other investment funds that are allowed to maintain a fixed net asset value of $1 should be required to have floating net asset values.” 
  • Rescind mortgage assets bankruptcy exemption. “Bankruptcy law for repurchase agreement collateral should be rolled back to the pre-2005 rules, which would eliminate mortgage-related assets from being exempt from the automatic stay in bankruptcy when the borrower defaults on its repurchase obligation.”
  • Regulate off-balance sheet transactions as on-balance sheet. “Off-balance-sheet holdings and exposures should be supervised and regulated as if they were on-balance-sheet.”

“Restricting banks to the activities mentioned above will allow capital regulation to be simplified and improved.“

Source: FT.com / Thomas Hoenig – Why the sign must say: no UBS in the USA

8 Comments
  1. flow5 says

    He doesn’t go far enough. The cbs should not be allowed to buy their liquidity. They should follow the old fashioned practice of storing their liquidity. That is, the commercial banks should be put out of the savings business (not be permitted to pay for, as a system, what they already own).

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