WASHINGTON (MNI) – The following is the text of a letter sent
Thursday by Kansas City Fed President Thomas Hoenig to Sen. Blanche
Lincoln, supporting her proposal to separate banks’ “higher-risk”
activities from their commercial activities:

As you know, commercial banks are the trusted guardian of
depositors’ funds and the primary intermediary of the national and
global payments systema role that is critical to our countrys
financial and economic stability. I have been a long-time proponent of
limiting the derivative activities of commercial banks to only those
designed to mitigate the institutions balance sheet risk. Accordingly,
I support the reinstatement of Glass-Steagall-type laws to separate
higher-risk, often more-leveraged, activities of investment banks from
the commercial banking system.

Section 716 appropriately allows banks to hedge their own
portfolios with swaps or to offer them to customers in combination with
traditional banking products. However, it prohibits them from being a
swaps broker or dealer, or conducting proprietary trading in
derivatives. The risks related to these latter activities are generally
inconsistent with the funding subsidy afforded institutions backed by a
public safety net. Such activities should be placed in a separate entity
that does not have access to government backstops. These entities should
be required to place their own funds at risk.

I appreciate the opportunity to comment on this matter which is of
utmost importance to our nation’s long-term financial and economic

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

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