Hoenig: TBTF Has an Unfair Advantage Over Community Banks
Filed under: duh, dude
Kansas City Fed President Thomas Hoenig gave testimony today to the House Subcommittee on Oversight and Investigations in which he expressed a little concern over the unfair treatment TBTF gets in comparison to smaller, community banks. I remind dear reader that Hoenig's 10th district supervises a total of 0 TBTF banks and hosts a little over 1000 smaller ones.
There are 83 "large banks" in the United States and nearly 5000 smaller ones so why is it we're letting the big boys get away with murder while the little guys are going down by the handful every Friday?
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.
I'm sad to say that part of the problem is the accounting. The big boys are allowed to keep so much of their extracurricular market activity off-sheet and because this clandestine behavior can threaten the very economic sanity of our nation (as we learned in 2008), they continue to take on leverage that any normal bank wouldn't go near. The community banks are forced to compete with this distorted model because if they don't, they'll die. Unfortunately, as we've seen in the last two years, if they do they'll die too.
Where does it end? I think we could start by killing the FDIC and thereby eliminating the moral hazard problem. Then depositors would be forced to do their own research (how about instituting clear, easy-to-understand information about an individual bank's leverage and investment activities for starters?) and choose based on the health of a particular bank, not just by who can offer the most free toasters.
The full text of Hoenig's remarks may be found here and props to Kansas City Fed for a stunning website redesign, it looks awesome. The Fed still sucks donkey balls but A) at least their president doesn't have his head shoved up his ass and B) at least the website looks nice.