WASHINGTON (MNI) – The following is the text of the remarks of
Kansas City Federal Reserve Bank President Thomas Hoenig prepared
for the William Taylor Memorial Lecture Sunday:

IT’S NOT OVER ‘TIL IT’S OVER: LEADERSHIP AND FINANCIAL REGULATION

The views expressed by the author are his own and do not
necessarily reflect those of the Federal Reserve System, its governors,
officers or representatives.

Introduction

I was honored to be asked to speak at this year’s William Taylor
Memorial Lecture. I worked with Bill from the time he arrived at the
Board of Governors until he left to lead the FDIC. During the period
that he led bank supervision activities for the Federal Reserve, I was
in banking supervision at the Federal Reserve Bank of Kansas City,
serving in a variety of areas from banking economist, to merger analyst,
to discount window officer, to the officer in charge of Financial
Supervision. During that period, including the crisis of the ’80s,
nearly 350 banks were closed or received open assistance in the Kansas
City District states alone. I think it’s fair to say I was a student of
Bill Taylor.

During the recent financial crisis, as ever more serious problems
emerged, I couldn’t help but think back to Bill. I remembered how he
managed the numerous problems that emerged with almost infinite
regularity during that earlier period; how he led our efforts in dealing
with the Ohio thrift crisis, the New England financial crisis, the
Midwest ag crisis, the Southwest energy crisis and bank failures as
large as Continental Illinois, which at that time was the seventh
largest bank in the United States with operations in 29 countries. I
recall how Bill coolly dealt with CEOs of the largest banks in America.
He also was blunt and straight with the facts when working with us in
the field or in talking to a senator, or even to his boss, Paul Volcker.

As I looked back to this period, it occurred to me that few of our
current examiners were around during those years and fewer still knew
Bill, so at our Bank we wrote a small book called Integrity, Fairness
and Resolve: Lessons from Bill Taylor and the Last Financial Crisis,
which has circulated to bank examiners pretty broadly. A copy is
available for each of you this evening, and I hope you will take the
opportunity to read this short biography that explains why so many
respect Bill Taylor so highly.

I cannot say with certainty how Bill would have dealt with all
aspects of this most recent crisis. But like Paul, I am confident we
would have been well served had Bill Taylor been with us in the times
leading up to this crisis, and that the regulatory reform legislation
just enacted would have been something less than 2,300 pages long. That
said, the Bill Taylor story isn’t just the what-if musings of a bank
supervisor. The story is about leadership and is particularly timely now
because without strong leadership, current regulatory reform efforts
will fail.

The president’s signature on the Dodd-Frank Act is only the
beginning of a process. The Act is long, complex, sometimes extremely
precise and other times vague and confusing. It has provisions which
require that an enormous number of rules be written and expertise be
developed across a host of financial activities and firms. With that in
mind, I will touch on only a sample of the key issues that confront us
with this legislation and its implementation.

First, the Act outlines a method to resolve our largest firms, and
I am hopeful that it will be implemented with force and clarity.
However, until proven otherwise, it would be unwise to ignore the
reality of size and influence on future decisions regarding these
largest institutions.

Second, uncertainty around “too big to fail” makes the Volcker Rule
and the implementation of strong capital rules all the more critical in
minimizing the likelihood that these institutions again cause a
financial crisis that undermines our national and global economies.

Third and most important, we need leaders like Bill Taylor who
understand financial institutions and have the wisdom to ask the right
questions, the courage to call it as they see it and the resolve to
overcome the inevitable obstacles to strong supervision.

Resolution and the Future

As we think about a resolution process for this country’s largest
financial institutions, it is important first to consider what the
failure of such a firm implies for our economy. The largest bank holding
company in the United States controls more than $2.4 trillion of assets,
which is roughly 16 percent of GDP. The largest five institutions
control $8.4 trillion of assets, nearly 60 percent of GDP, and the
largest 20 control $12.8 trillion of assets or almost 90 percent of GDP.

It’s pretty certain that should any one of these firms encounter
significant trouble, the negative, systemic effects for creditors would
be immediate and the adverse impact on businesses and consumers would
soon be evident. The uncertainty from such a failure on other firms who
are interconnected or who followed the same lending path would affect
confidence in the entire national and global economies.

The Dodd-Frank Act outlines a process for resolving failed
“systemically important” firms at no cost to taxpayers. It calls for
taking a firm into receivership when it defaults and having stockholders
and creditors absorb the losses to avoid taxpayer bailouts. It allows
for bridge banks and transitional funding to continue essential
operations and services for maintaining financial stability. To the
extent that we achieve this outcome, our economy and our country will be
well served.

However, the reality is that the possible adverse effects on the
global economy of a failure of such a firm would be enormously
destabilizing and harmful.

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

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