FDIC Vice Chairman Delivers Remarks Regarding Changing the Structure of the U.S. Financial System (with Lofchie Comment)
Thomas M. Hoenig, Vice Chairman of the FDIC, gave a speech touting the benefits of changing the structure of the U.S. financial system so that complex financial firms would be separated along business lines and into separate corporate entities. He criticized the broad expansion of the U.S. financial safety net in the years preceding the recent crisis, arguing that its effect was to erode economic stability rather than promote it. Hoenig then characterized the regulatory response to the financial crisis, including the reforms mandated by the Dodd-Frank Act, as "complicated administration" rather than true structural change. As a result, he argued, the same subsidies that encouraged the last economic crisis continue to exist and, coupled with the increasing complexity of large financial firms, will continue to undermine financial stability. In contrast, structural reforms that would confine the safety net and statutorily separate activities along business lines would make large financial organizations more manageable and would "enhance the market's role in disciplining behavior."
Lofchie Comment: Vice-Chairman Hoenig's speech raises fundamental questions. Is Dodd-Frank a negative for financial stability in that it leads to further concentration of market exposure into a few clearing corporations and further complicates the regulatory system? Is the under-performance of large financial institutions the result of under-performance in the market place or is it the result of governmental actions, including the adoption of Dodd-Frank? How does his "small is beautiful" (or at least profitable) message correlate with the fact that the failure rate of small banks is increasing?The point of these questions is to emphasize that the Vice Chairman's remarks raise issues of the type that should have been confronted before adopting Dodd-Frank. Several years later, the majority of Dodd-Frank has not been implemented, yet the financial system is already exhausted with efforts to keep up with new regulations as they come on line. It is an interesting moment for the Vice-Chairman of the FDIC to say that perhaps we should have gone in a different direction.