If big U.S. banks are not forced to sever their investment arms from traditional banking, they will return to behavior that led to the 2008 credit crisis, said Thomas Hoenig, Federal Deposit Insurance Corp. board member and former Federal Reserve Bank of Kansas City President.
“The behavior and practices leading to this crisis will soon reemerge and these highly complex, more vulnerable firms will have an even more devastating effect on the economy,” Hoenig said in remarks yesterday at the Exchequer Club in Washington. “Activities leading to the crisis continue today — and continue to be subsidized — well after the lessons should have been learned.”
Regulators should reinstate a separation between commercial banking and brokerages, a kind of “modern version” of the Glass-Steagall Act to separate commercial banking from brokerage operations, Hoenig has argued since before joining the FDIC in April. The public safety net should not protect the banking industry’s trading risks, he said.