“A Market-Based Proposal for Regulatory Relief and Accountability” -- Remarks by FDIC Vice
Chairman Thomas M. Hoenig, Presented to the Institute of International Bankers Annual
Washington Conference, March 13, 2017
Introduction
Promoting economic strength and sustainable growth is a common objective of nations around
the world, and the shape of the financial landscape in which this can best be achieved is rightly
subject to fierce debate. As we contemplate the paradigm here in the United States, we have two
distinct choices. One is to preserve the system that emerged from the most recent financial crisis.
The other is to reshape and reinvigorate the banking system by ending too-big-to-fail, enhancing
competition, and rebuilding trust in our financial firms.
As memory of the financial crisis of 2008 fades, we must remain vigilant. We all know that this
event was not the only one of its kind. Indeed, the United States has experienced 14 major
banking crises dating back to 1837. I have been on the front line for at least three of them in the
40-plus years that I have worked in bank supervision. While the reasons behind each crisis have
been different, each has caused serious harm to individuals and the economy. It does not matter
what politician or party is in office or whether new technology is put in place to better inform the
industry, banks will inevitably come under stress and some will fail—and a truly capitalistic
system should allow them to do so. Rather than try to prevent bank failures, our goal should be to
prevent the consequences of failures from requiring public bailouts and instead allow private
owner equity to absorb the shocks.
The Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted in response to
the most recent crisis. While well intended, its many and complicated regulations are
burdensome for all banks, but especially smaller banks. The legislation also has served to
enshrine too-big-to-fail for the largest, most complex universal banks, providing them with a
powerful competitive advantage.
Today I will outline an alternative approach to better address the challenge of too-big-to-fail,
regulatory burden, and competitive equity. The proposal would not reduce the ability of a
universal bank to conduct any of its current portfolio of activities, whatever they might be. It
would, however, partition nontraditional bank activities into separately managed and capitalized
affiliates to return the safety net back to its original scope and purpose. The proposal also would
require greater owner equity at risk for large, complex, universal banks, as defined in the
accompanying term sheet. With these conditions in place, too-big-to-fail would be well on its
way to being addressed, and a true opportunity for regulatory relief for these largest banks would
be provided. We could pare back the thousands of pages of rules that inhibit bank performance
and level the competitive playing field without undermining the stability of our financial system
and economy.
A Proposal for Accountability and Regulatory Relief
Chairman Thomas M. Hoenig, Presented to the Institute of International Bankers Annual
Washington Conference, March 13, 2017
Introduction
Promoting economic strength and sustainable growth is a common objective of nations around
the world, and the shape of the financial landscape in which this can best be achieved is rightly
subject to fierce debate. As we contemplate the paradigm here in the United States, we have two
distinct choices. One is to preserve the system that emerged from the most recent financial crisis.
The other is to reshape and reinvigorate the banking system by ending too-big-to-fail, enhancing
competition, and rebuilding trust in our financial firms.
As memory of the financial crisis of 2008 fades, we must remain vigilant. We all know that this
event was not the only one of its kind. Indeed, the United States has experienced 14 major
banking crises dating back to 1837. I have been on the front line for at least three of them in the
40-plus years that I have worked in bank supervision. While the reasons behind each crisis have
been different, each has caused serious harm to individuals and the economy. It does not matter
what politician or party is in office or whether new technology is put in place to better inform the
industry, banks will inevitably come under stress and some will fail—and a truly capitalistic
system should allow them to do so. Rather than try to prevent bank failures, our goal should be to
prevent the consequences of failures from requiring public bailouts and instead allow private
owner equity to absorb the shocks.
The Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted in response to
the most recent crisis. While well intended, its many and complicated regulations are
burdensome for all banks, but especially smaller banks. The legislation also has served to
enshrine too-big-to-fail for the largest, most complex universal banks, providing them with a
powerful competitive advantage.
Today I will outline an alternative approach to better address the challenge of too-big-to-fail,
regulatory burden, and competitive equity. The proposal would not reduce the ability of a
universal bank to conduct any of its current portfolio of activities, whatever they might be. It
would, however, partition nontraditional bank activities into separately managed and capitalized
affiliates to return the safety net back to its original scope and purpose. The proposal also would
require greater owner equity at risk for large, complex, universal banks, as defined in the
accompanying term sheet. With these conditions in place, too-big-to-fail would be well on its
way to being addressed, and a true opportunity for regulatory relief for these largest banks would
be provided. We could pare back the thousands of pages of rules that inhibit bank performance
and level the competitive playing field without undermining the stability of our financial system
and economy.
A Proposal for Accountability and Regulatory Relief
Partition Bank Activities and Preserve the Safety Net
A major feature of this proposal is more effective use of the bank holding company business
model. It would require large, complex, universal banks to separately capitalize and manage their
traditional commercial banking activities and their nontraditional activities, such as investment
banking.1 While this model allows for many of the synergies of commercial and investment bank
activities, it also serves to return the safety net to its original purpose—that of protecting the
payments system and the depositor—and reduce the associated moral hazard.
This approach would also provide a far more competitive environment among investment
banking firms as they serve our economy. Over time, as the safety net has been allowed to cover
expanded activities conducted within commercial banks, the investment banking operations
affiliated with insured banks gained a noticeable competitive advantage over noninsured
competitors. Data show that for nonbank financial service providers, such as independent broker-
dealers not affiliated with an insured bank, tangible equity measures 8 percent of assets, whereas
many nonbanks that are affiliated with an insured bank operate with substantially less capital
measuring about 5 percent of assets.
Under this proposal, traditional banking activities generally found in an insured depository
institution and nontraditional banking activities, such as investment banking, would each be
structured under one or more separately capitalized intermediate holding companies of a
financial holding company (FHC). And each intermediate holding company that houses
nontraditional banking activities would become a separate affiliate, separately capitalized and
separately managed from the insured bank. In addition, each intermediate holding company
would be structured in a manner that would make it a “resolvable” entity that could withstand the
normal bankruptcy process.
Capitalization
A nontraditional intermediate holding company would be capitalized using tracking shares
issued by the ultimate parent. This is a relatively common practice used by commercial firms to
separate a key franchise in one operating division from new or riskier activities in another.
Tracking shares are generally a separate class of stock of the holding company that give
economic rights to a discrete set of assets—in this case the shares of the intermediate holding
company. This would allow management to unlock value in each line of business while
insulating the insured depository institution from potential losses.
Resolvability
The nontraditional intermediate holding company would also be subject to independent liquidity
requirements designed to eliminate or limit access to the public safety net and to ensure that, if it
1 This is similar in concept to John Vickers’s proposal adopted in the UK.
A major feature of this proposal is more effective use of the bank holding company business
model. It would require large, complex, universal banks to separately capitalize and manage their
traditional commercial banking activities and their nontraditional activities, such as investment
banking.1 While this model allows for many of the synergies of commercial and investment bank
activities, it also serves to return the safety net to its original purpose—that of protecting the
payments system and the depositor—and reduce the associated moral hazard.
This approach would also provide a far more competitive environment among investment
banking firms as they serve our economy. Over time, as the safety net has been allowed to cover
expanded activities conducted within commercial banks, the investment banking operations
affiliated with insured banks gained a noticeable competitive advantage over noninsured
competitors. Data show that for nonbank financial service providers, such as independent broker-
dealers not affiliated with an insured bank, tangible equity measures 8 percent of assets, whereas
many nonbanks that are affiliated with an insured bank operate with substantially less capital
measuring about 5 percent of assets.
Under this proposal, traditional banking activities generally found in an insured depository
institution and nontraditional banking activities, such as investment banking, would each be
structured under one or more separately capitalized intermediate holding companies of a
financial holding company (FHC). And each intermediate holding company that houses
nontraditional banking activities would become a separate affiliate, separately capitalized and
separately managed from the insured bank. In addition, each intermediate holding company
would be structured in a manner that would make it a “resolvable” entity that could withstand the
normal bankruptcy process.
Capitalization
A nontraditional intermediate holding company would be capitalized using tracking shares
issued by the ultimate parent. This is a relatively common practice used by commercial firms to
separate a key franchise in one operating division from new or riskier activities in another.
Tracking shares are generally a separate class of stock of the holding company that give
economic rights to a discrete set of assets—in this case the shares of the intermediate holding
company. This would allow management to unlock value in each line of business while
insulating the insured depository institution from potential losses.
Resolvability
The nontraditional intermediate holding company would also be subject to independent liquidity
requirements designed to eliminate or limit access to the public safety net and to ensure that, if it
1 This is similar in concept to John Vickers’s proposal adopted in the UK.