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“Too Big to Fail” Critic Given Post at FDIC

Thomas Hoenig, a former Federal Reserve bank president who was highly critical of the “too big to fail” policy toward the largest US banks during the financial crisis, will now have a chance to do something about that policy as he has been nominated by President Obama as the new vice chairman of the Federal Deposit Insurance Corporation.  The FDIC is the government agency responsible for insuring bank deposits and closing banks down when they fail.

Hoenig has been a very outspoken critic of the large banks, which, under Dodd-Frank regulatory reforms, have been referred to as systematically important financial institutions, or SITIs.  The current wave of “Occupy” protests around the nation, however, refer to the institutions as “too big to fail” banks, and the bailouts of these banks during the financial crisis are a chief focus of the movements.

Under regulations outlined by the Dodd-Frank bill, passed last year, the FDIC will shoulder the responsibility of unwinding big banks that are failing.  In a speech in June, the then-president of the Federal Reserve Bank of Kansas City Hoenig said that the actions of the big banks have been “fundamentally inconsistent with capitalism.”  Hoenig went on to say that as long as the concept of a SIFI exists, the concept of capitalism is at risk and global market economy is in jeopardy.

Currently, there is significant debate going on as to what banks will be allowed to do in terms of trading financial assets under Dodd-Frank.  The proposed Volcker Rule would allow banks to conduct trades on behalf of their customers but prohibit so-called proprietary trading, in which they conduct trades to generate profits for themselves.  The FDIC's board earlier this month approved an early draft of the Volcker Rule, allowing a period of public discussion on the legislation to begin.

Hoenig has made it clear that he wants to do away with trading by banks altogether, explaining that allowing trading for customers but banning proprietary trading would just encourage banks to continue with all types of trading but hiding proprietary transactions within trades conducted for customers.  Besides his rather harsh views on the US banking system, Hoenig is also known as the man who cast the lone dissenting vote against the Fed's QE2 program in November.