By Brai Esene

WASHINGTON (MNI) – The nation’s largest banks are a bigger threat
than ever to the economy, Kansas City Federal Reserve Bank President
Thomas Hoenig said Wednesday.

Repeating a favorite theme, Hoenig told the Women in Housing and
Finance group, “History is on my side” in his view that, “We must break
up the largest banks.”

“I am convinced that the existence of too-big-to-fail financial
institutions poses the greatest risk to the U.S. economy,” he said.

Hoenig dismissed the Dodd-Frank legislative constraints on banking,
the promise that better bank supervision can restrain the risks and the
credit rating agency views that implicit government support can make the
big banks better risks.

Instead, even after the crisis, he said, government has given the
biggest banks the leeway to get bigger by extending funding advantages
and every implicit assurance the government will stand behind them in
the next crisis.

“In a competitive marketplace, where just a few basis points make a
difference, these funding advantages are huge and represent a highly
distorting influence within the financial markets,” Hoenig said.

So now the give largest banking organizations now have 52% of all
banking industry assets, up from 38% before the financial crisis, he
said. “What clearer sign could we find that market disicipline no longer
exists?”

“It is ironic that in the name of preserving free market capitalism
in this country, we have undermined it so deeply,” he said.

To change the game, Hoenig said, the big banks must be convinced
“they are fully at risk.” But under Dodd-Frank “the final decision on
solvency is not market driven but rests with different regulatory
agencies and finally with the Secretary of the Treasury, which will
bring political considerations into what should be a financial
determination.”

When another crisis arrives, “there will always be an overwhelming
impulse to avoid putting such institutions through receivership,” he
said.

That will happen because of “overstated fears” that public
confidence will be shattered, creditors or depositors at other
institutions will panic, and that there are too may connections that
will bring down other institutions,” he said. “In addition, important
services will be lost and the international activities will be too
complex to resolve.”

Hoenig said that in reality “the long-term consequences are much
more severe if we fail to take action to end this cycle of repeated
crises.”

Since too-big-to-fail institutions cannot be effectively
supervised, capitalized or resolved, it follows the only solution is “to
break them up,” he said. “We should vigorously pursue the restructuring
of these firms in a manner that mitigates risk and that would influence
the size and complexity of thesse firms,” he said.

“It is time we ended the cycle of ‘failure and reward’ and return
to ‘failure as failure,” Hoenig said.

Answering questions after his speech, Hoenig said Fannie Mae and
Freddie Mac should be reprivatized so they disappear over time.

Meanwhile, Fed monetary policy should be more long-term oriented,
and move away from zero rates of interest, he said, to better calibrate
with economic recovery.

** Market News International Washington Bureau: 202-371-2121 **

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