MNI INTERVIEW2: Hoenig 'Totally Opposed' To New Capital Rules

Proposed higher U.S. banking capital requirements are "pure waste and complexity" because they rely on risk-weighted measures that don’t accurately capture financial threats, former FDIC vice chair Thomas Hoenig told MNI.

Fed Vice Chair for Regulation Michael Barr in July unveiled new proposed rules in conjunction with the FDIC and the OCC that would require U.S. banks with USD 100 billion or more in assets to have an additional two dollars of capital for every hundred dollars of risk-weighted assets. The plans contain a series of other provisions aimed at aligning American regulation with new Basel III standards.

“I am totally opposed to this. I think it’s just pure waste and complexity that would achieve nothing. I am a proponent of leverage ratios,” said Hoenig, also former President of the Kansas City Fed, in an interview at Jackson Hole, referring to more straightforward measures of how much banks rely on borrowed money to fund their operations. (See MNI INTERVIEW: U.S. Urged To Require Banks To Recapitalize)

“I would be willing to bet you couldn’t find five directors in America who understand risk-weighted capital. And I don’t think you could find many more, if even that many, bank CEOs that understand risk-weighted capital.”

Hoenig noted one of the papers presented at the conference argued leverage ratios are harming Treasury market liquidity, but he said that logic is a twisted way of justifying a loosening of constraints on excessive government borrowing.

SCARED TO DEBT

“I’m scared to death of the rate of growth of federal debt in this country,” he said.

The leverage ratio is superior to risk-weighted capital requirements because “it gives you a clear view of how much a bank can lose before it’s in trouble,” Hoenig added.

“To throw that away because of wanting to issue all kinds of federal debt I think it’s wrong. If there’s a liquidity problem you can of course exempt it as you did during the pandemic.”

With the federal debt set to rise by USD 2 trillion this year and USD 3 trillion next year, interest on the debt is on track to exceed the country’s past deficits.

“The interest on the debt will contribute 3.5% on optimistic projections to the deficit and historically that was the whole thing. Now everything is going to be 7, 8, 9% of GDP.”