Thomas Hoenig: 'Too Big To Fail' Threatens Small Banks

America's "Too Big To Fail" banking institutions threaten the viability of community banks, a top Federal Reserve official said Monday.

In prepared remarks in front of the House Subcommittee on Oversight and Investigations, Thomas Hoenig, the president of of the Kansas City Fed, bemoaned the "competitive disadvantage" that large banks enjoy and called community banks "essential" to local and regional economies.

Community banks, generally defined as having less than $10 billion in assets, account for all but 83 banks in the U.S, he said. Large banks, however, had the privilege of higher levels of risk and more explicit government backstops. Here's Hoenig:

Because the market perceived the largest banks as being too big to fail, they have had the advantage of running their business with a much greater level of leverage and a consistently lower cost of capital and debt. The advantage of their too-big-to-fail status was highlighted during the crisis, when the FDIC allowed unlimited insurance on non-interest-bearing checking accounts out of concern that businesses would move their deposits from the smaller to the largest banks.

Hoenig, who's been vocal critic of the Fed's low interest rate policy, added that "the community bank business model has held up well when compared with the megabank model that had to be propped up with taxpayer funding." In contrast to large banks, community banks have a larger "vested interest" in local economies, he said. Here's more from Hoenig:

It is said that a community with a local bank can better control its destiny. Local deposits provide funds for local loans. Community banks are often locally owned and managed - through several generations of family ownership. This vested interest in the success of their local communities is a powerful incentive to support local initiatives. It is the very "skin in the game" incentive that regulators are trying to reintroduce into the largest banks. It's the small community's version of "risking your own funds" that worked so well in the original investment banking model, and kept partners from making risky mistakes that would result in personal bankruptcy back then, and government intervention more recently.

Community banks, it turns out, are actually doing a better job lending, Hoenig said:

Data show that community banks have done a better job serving their local loan needs over the past year. Community banks, as a whole, increased their total loans by about 2 percent as compared to a 6 percent decline for larger banks. In addition, community banks have had either stronger loan growth or smaller declines across major loan categories. Business lending in particular stands out, with community bank loans dropping only 3 percent as compared with a 21 percent decline for larger banks.

READ Hoenig's full prepared remarks:

hearing-testimony-8-23-10

Comments

[Suane]

07:34 PM on 09/25/2010

Bro Clinton tell bro Obama to not let the republicans get him off message by listening to deficit talk, go ahead and spend as much money as the congress will let him have on the infrastructure. That's the best way to get people back to work and spending money and it sure want hurt to help build up this raggedy country. The people will be behind you because they know it's needed and the republicans can't say a thing against it because they'll be wanting some of the money too. Check out Beijing and see the progress they've made over the pass few years and who do we owe alot of the money to we've been spending anyway, lets just borrow some more, we can't let them out do us with our money now can we..........

[RangeRover]

02:28 PM on 08/24/2010

Obama needs to speak out on this financial mess. Help write the speech he should give here:

[mrJJ]

07:57 AM on 08/24/2010

Fed Loses Bid for Review of Bailout Disclosure Ruling

An appeals court refused to reconsider a decision compelling the Federal Reserve Board to release documents identifying banks that might have failed without the U.S. government bailout.

The full U.S. Court of Appeals in New York, in a docket entry dated Aug. 20, denied a May 4 request by the Fed to review a three-judge panel’s unanimous March 19 decision requiring the agency to release records of the unprecedented $2 trillion U.S. loan program begun primarily after the 2008 collapse of Bear Stearns Cos.

http://www.bloomberg.com/news/2010-08-23/u-s-appeals-court-refuses-to-review-disclosure-ruling-on-fed-bailouts.html

[killben]

02:38 AM on 08/24/2010

Goodbye, Mr.Hoenig!

It is a matter of time before he is given the boot for saying the obvious which is considered blasphemy by Treasury, Fed and Government.

One thing is obvious .. he will never be a Fed Chief! You need to be more of a political animal making the right moves and meeting the right people remember bernanke doing his rounds to the senators with a vote begging hat ...

[StuffMoreStuff]

02:57 PM on 09/01/2010

Yeh, it is funny about the fed. In an attempt to be apolitical they actually becoming embarrassingly politcial. Right now is a great example. They don't want to ruffle any feathers ahead of the election.

[Siebenstein]

11:40 PM on 08/23/2010

Noone besides him cares. That's that. Clown Theatre TBC

[therealist2000]

11:29 PM on 08/23/2010

Too big to fail, too big to exist. I would break up all banks beyond a certain size...if they are needed beyond the intermediate level, they should be treated as utility companies.

[Trout007]

07:48 PM on 08/31/2010

Maybe we can just not bail them out next time?

[Javagold]

10:03 PM on 08/23/2010

should have let the big banks fail, only those on the top would have felt the most pain, we already would be on our way toa full recovery instead of waht we have now which is constant uncertainty and moral hazard

[MarsAmbassador]

07:42 PM on 08/23/2010

Obama should be listening to three people on economics and three people only:
1) Paul Krugman
2) Elizabeth Warren
3) Paul Volker

Anyone else need not apply.

[Bennett Walker]

05:20 PM on 08/23/2010

why isn't this at the top of huff post? seriously, this is probably the most relevant news I've read all day.

[pauldeba]

04:41 PM on 08/23/2010

"America's "Too Big To Fail" banking institutions threaten the viability of community banks"

That is not what he said. He said "American Government's "Too Big To Fail" policy towards banking institutions threaten the viability of community banks"

[1110Awaits]

06:01 PM on 08/23/2010

Yup. Gub'ment is the only solution. They've come through so consistently in the recent past; Fannie, Freddie, GM, Chrysler, Dodge, AIG, B of A all glowing examples of how gub'ment fixes all of our problems. As long as the gub'ment is involved in keeping the playing fields "level", it will remain level. We'll all be at the mercy of the gub'ment. Excuse me, could you give me another week of unemployment? I promise I'll vote for you. You are the only person that cares about my success.

[Derek Stottlemyer]

04:22 PM on 08/23/2010

That is the whole point. There is a concerted conspiracy by the top banks to eliminate almost all competition so that the whole system of credit is in their hands. Let me tell you, they are well on their way. The top 5 American banks have a value close to 60% of US GNP. That is unbelievable. With the increased centralization of credit comes almost totalitarian control:

"Give me control of a nation's money supply, and I care not who makes its laws." Mayer Amschel Rothschild of the Rothschild banking dynasty.

This is the situation we are in. The Fed controls our money supply, and nothing changes. The Fed is essentially above the government and the Chairman of the Fed is the true 'temporary' ruler of the country.

[Sundialsvc4]

05:12 PM on 08/23/2010

Wel-l-l-l ...

As with everything else concerning this group of people, "it really depends entirely upon whose set of numbers you choose to believe."

I have the Brooklyn Bridge to sell you... one hundred thousand times. WELL-L-L, strictly speaking, what I am selling you is a promise that the current mortgage holder on the Brooklyn Bridge will not default. WELL-L-L, strictly strictly speaking, I'm selling you the right to collect gobs of money if he does. WELLL-L-L-L-L, strictly strictly strictly speaking, "what the hell do you care why I say this security is worth millions of dollars, anyway? It IS! Because I SAY it is, that's why! And all YOU gotta do is to sell it to The Greater Fool! (Or better yet, clone a thousand copies and sell "derivative securities" to a thousand Greater Fools!!) As long as YOU are not the one left holding the bag, what do you care what's in the bag, anyway?"

Ahem.

Here's the skinny, Derek: "it's a scam. It's a 100%-and-then-some scam. But it's a trillion-dollar scam, Because They Say It Is. And also, because 'they' includes some very, very high ranking civil officers of the United States Government."

[Derek Stottlemyer]

05:51 PM on 08/23/2010

Right on, Sundial, right on. Some of my closest friends are in investment banking and to hear the stories of what they are told is truly harrowing. The corruption is truly systemic and many of the managers within these parasitic entities are soulless.

And your lil anecdote is hilarious by the way: I completely agree and that is why I turned down a job to be in investment banking because I need to earn an honest buck at the end of the day.

By the way, fanned and faved. blessings!

[bayviking]

04:18 PM on 08/23/2010

No one on the US economic team gives one hoot about the little guy or little company.

[varro]

11:02 PM on 08/23/2010

Or even a little Fed bank, for that matter. Unless you're New York or *maybe* SF, you don't matter....gotta keep the revolving door of investment bank to Fed to Washington to New York Fed to megabank moving.

[Vincent Gormley]

04:11 PM on 08/23/2010

So Mr Hoenig, tell us something we don't know. We already knew that community banks were doing a better job at lending. So let's begin the process of breaking up the 'Too Big To Fail' banks in a careful well thought out manner. First prohibit them from swallowing up any other failing entities. Let's have closer reviews of their policies and activities and make them public immediately. Simply put everyone at the Fed do their job or leave. Also we need Elizabeth Warren appointed and confirmed as soon as Congress returns. Any objections? I challenge those who might to say it publicly so we can relieve of your job and anxiety!

[Sundialsvc4]

04:06 PM on 08/23/2010

The gambit played by the mega-banks was quite simple: (1) engage in securities fraud, wire fraud, usury, extortion, racketeering ... you name it; and (2) rely upon the payment of billions of dollars a day (no joke) in bribes to make it all work.

For many years, without question, "the fix was in." And, as long as the economy could be zapped with "bubble upon bubble," no one seemed to officially care.

Thousands of smaller banks labored to pursue their business as they had always done it, continuing to act as though Glass-Steagall made perfect sense (which, in fact, it does). It is a testament to their business acumen that they have managed to survive.

But it is extremely difficult to do that when "the fix is in." When both the Department of the Treasury and the Federal Reserve are run by co-conspirators. When the Senate and House committees that run your core businesses are proffered ... and accept ... millions of dollars in bribes every single day.

When you pause and consider that what you are dealing with, at the very top of this thing, is a gang of very, very dangerous criminals, it becomes easy to see how "a spectacular melt-down of the entire consumer economy" would Be Extremely Profitable Indeed. And it might even seem plausible to grasp why the utter depravity of this very thought would be ... "no problem!"

[Mafdet]

04:06 PM on 08/23/2010

All kinds of shocking revelations in today's news. Earlier Paul Krugman JUST NOW has reason to suspect that there might be corruption in our government. Now Tom Hoenig is suggesting that, say, Chase Morgan, might be bad for small banks.

Again, what was your first clue Tom? Since small banks borrow from big banks the same way small business borrows from banks, was it that instead of sending our bail out money back through the banking system to help small business and spur employment in 2009, Blankfein and Dimon sat on our bail out money long enough for hundreds of small banks to collapse and their assets be acquired by...Chase bank?

[Liberal2009]

10:41 AM on 08/25/2010

Where there's smoke there's fire.