FDIC’s Hoenig Keeps Wall Street on Edge

(The Wall Street Journal) – FDIC Vice Chairman Thomas Hoenig has emerged as one of the most influential detractors of big banks—the only top regulator in Washington who has directly called for their dismantling.

One month before he assumed the No. 2 post at the Federal Deposit Insurance Corp., Thomas Hoenig sat before a group of global bankers in Tokyo and told them he believed their firms ought to be broken apart.

“Holy mackerel,” a U.S. bank lobbyist who was in the audience that day in October 2012 recalls thinking. “Thank goodness he’s not the chairman.”

Mr. Hoenig isn’t the FDIC’s leader, but as vice chairman he wields enough influence tokeep big banks on edge. The 68-year-old former head of the Federal Reserve Bank of

Kansas City has emerged as one of the most influential detractors of big banks—the only top regulator in Washington who has directly called for their dismantling.

His stance has helped shape policies that are restricting and restructuring the way megabanks do business. Mr. Hoenig helped push through stricter capital rules adopted earlier this year, won tougher regulatory language outlining how the government would unwind a large, failing financial firm and urged fellow regulators to send big banks back to the drawing board on their “living will” plans to avoid a taxpayer bailout in the event of a crisis.

This week, he signaled he won’t stop pressuring banks to fix those plans—a worrying prospect for Wall Street given that the FDIC and Federal Reserve have the power to force divestitures at firms that can’t show they have a credible bankruptcy path.

Mr. Hoenig declined to be interviewed for this article. “We have concentrated our risk in these [larger] institutions,” he said Tuesday in a speech in Arlington, Va., where he distributed charts he often carries showing large banks use more borrowed money to fund loans than smaller banks. “My major worry is the perception that, since the passage of the [2010 Dodd-Frank] Act, we have really become a much more sound and stable financial system. I question that.”

Mr. Hoenig’s tough talk is reverberating on Wall Street, where bankers privately fret about his pronouncements that big banks remain risky and benefit from a continuing perception the U.S. would rescue them in a crisis.Tim Pawlenty, head of the industry group Financial Services Roundtable, hinted at his frustration with the stance advocated by Mr. Hoenig while appearing on stage with him at a banking conference in March. The Dodd-Frank law, Mr. Pawlenty said, made taxpayer bailouts illegal, but “many policy makers look at that and say … ‘I choose not to believe what’s written on the paper.’ ”

Mr. Hoenig said at the conference that the law allows for temporary government support, sending the message that the biggest banks will remain open for business and giving them a competitive advantage. Asked whether a solution could be found this year for the perception that some banks are too big to fail, he quipped, “It depends on whether or not people listen to me.”

A Vietnam War veteran and son of a plumber from Fort Madison, Iowa, Mr. Hoenig served for decades as a bank supervisor for the Kansas City Fed, where he helped administer more than 100 bank failures. Colleagues and friends say that experience instilled in him a belief that a bank, no matter its size, needs the discipline that comes from knowing itwon’t be saved by the government. Mr. Hoenig, they say, noted that regional banks in his district with more traditional retail-banking business models weathered the financial crisis, while large, Wall Street firms with investment-banking businesses needed bailouts.

Mr. Hoenig fits with a tradition of Fed leaders from outside New York who are wary of Wall Street and warn of the dangers of “too big to fail.” He is “a believer in competition, letting the little guy have the air to breathe and grow,” said Richard Fisher, a friend and president of the Federal Reserve Bank of Dallas. “And [he is] very suspicious of the concentration of power.”

Mr. Hoenig became president of the Kansas City Fed in 1991 and grabbed headlines in 2010 for casting eight consecutive dissenting votes against then-Fed Chairman Ben Bernanke’s easy-money policies. That stance bolstered his reputation on Capitol Hill, particularly among Republicans who in 2012 put forward Mr. Hoenig’s name for a GOP seat on the FDIC board, despite his status as a political independent.

While lawmakers were working on Dodd-Frank, Mr. Hoenig met with their staff, building relationships through which he now advocates a new agenda: forcing the largest banks to separate investment banking from commercial banking and to fund their loans with far higher levels of investor capital than the current rules require.

He is embraced by both Republicans and Democrats who favor stricter curbs on Wall Street. When Sen. Sherrod Brown (D., Ohio) and Sen. David Vitter (R., La.), proposed a bill last year that would boost banks’ capital requirements, they consulted Mr. Hoenig to ensure his support, according to a congressional aide.

“Tom Hoenig has the right approach to financial regulation,” said Sen. Elizabeth Warren (D., Mass.), who has been a lunch partner of Mr. Hoenig’s twice since she took office in 2013. “He’s made it clear that we need to do a lot more to end ‘too big to fail’ and reduce the risk in our financial system to prevent another crisis.”

Some in Washington say the postcrisis crackdown on risk would have happened regardless of Mr. Hoenig’s agitating, noting FDIC Chairman Martin Gruenberg sets the agency’s agenda. Mr. Gruenberg, a former congressional staffer, generally shares Mr. Hoenig’s concerns about the risks posed by big banks but is more inclined to compromise, according to people familiar with his thinking.

To secure Mr. Hoenig’s vote in December for an FDIC proposal outlining how the government would unwind a large, failing financial firm, Mr. Gruenberg accepted Mr. Hoenig’s changes to parts of the document to include a discussion of whether the strategy was a bailout for banks and whether large firms receive a funding advantage over smaller competitors, according to people familiar with the matter.

Both of those points irked bank representatives, who say the strategy isn’t a bailout and a funding advantage doesn’t exist.

Last month, the Fed and the FDIC issued a sweeping rebuke of bankruptcy plans submitted by 11 of the largest global banks, putting them on notice that if the plans don’t improve, firms could face sanctions—a response Mr. Hoenig had advocated but which Mr. Gruenberg negotiated, according to people familiar with the talks. And Mr. Hoenig and Jeremiah Norton, another FDIC board member, pushed regulators to impose a so-called “leverage ratio” that requires banks to hold capital against every asset on their books, not just those deemed risky. The higher leverage ratio would curb the borrowed money that big banks use to finance their operations, and banks say it would limit their growth.

Mr. Hoenig played down his influence on policy decisions in an interview with The Wall said, adding that “the obligation of the job [is] to confront the issues, to make a judgment, and to step forward and explain.”