Former KC Fed Pres. Calling for Smaller Banks

Photo courtesy of wikicommons

KANSAS CITY – Tom Hoenig is a financial Cupid in reverse. While the angel with the arrows favors joining people together, Hoenig prefers breakups—banking breakups.

The former president of the Kansas City Federal Reserve and current board member of the Federal Deposit Insurance Corp. (FDIC) wants banks and investment firms to split, The Kansas City Star reports.

For decades mergers between banks and investment companies were banned by the Glass-Steagall Act, but the law was repealed in 1999, making way for large financial conglomerates such as Goldman Sachs and JPMorgan Chase.

With the repeal a legal barrier went away between commercial banks, which take deposits and issue loans, and investment banks, which help companies issue and trade bonds. Hoenig argues that Glass-Steagall’s repeal helped deepen the financial crisis.

As the Star reports:

A hallmark of the recent crisis, Hoenig said, was the ability of financial giants that acted as both a traditional bank and an investment bank to tap the government safety net to finance riskier securities activities.

The safety net includes FDIC insurance and the implicit guarantees that the biggest financial institutions carry because they’re seen as too big to fail, that they would be bailed out, as many were in the crisis.

“Even when you’re not officially covered, you’re covered,” Hoenig said of being too big to fail.

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