WASHINGTON — Federal Deposit Insurance Corp. Vice Chairman Thomas Hoenig announced a new policy proposal on Monday that would allow big banks to separate their core banking and investment activities in exchange for significant regulatory relief.

His plan comes less than a week after Sean Spicer, the White House’s chief spokesman, reiterated the Trump administration’s commitment to a modern version of the Glass-Steagall Act. That idea has been greeted warily by the banking industry, but Hoenig’s proposal could provide a path forward for Republicans interested in such a plan.

“We have two distinct choices,” Hoenig said in prepared remarks for a speech at the annual Institute of International Bankers conference in Washington. “One is to preserve the system that emerged from the most recent financial crisis. The other is to reshape and reinvigorate the banking system by ending ‘too big to fail,’ enhancing competition, and rebuilding trust in our financial firms.”

Thomas Hoenig, vice chairman of the FDIC
"With these conditions in place, 'too big to fail would be well on its way to being addressed, and a true opportunity for regulatory relief for these largest banks would be provided,” said FDIC Vice Chairman Thomas Hoenig. Bloomberg News

Hoenig’s plan would offer large banks the option of separating their commercial banking functions and their nontraditional activities into two separately capitalized intermediate holding companies. But unlike the original Glass-Steagall Act of the 1930s, both entities could still be owned by the same holding company.

In return for separating their activities, Hoenig’s plans would allow banks to forego a slew of regulatory requirements, including stress tests and new liquidity requirements from the Federal Reserve Board. In effect, the trade-off would allow big banks to face potentially higher capital requirements in return for simpler compliance rules.

“With these conditions in place, ‘too big to fail’ would be well on its way to being addressed, and a true opportunity for regulatory relief for these largest banks would be provided,” Hoenig said. “We could pare back the thousands of pages of rules that inhibit bank performance and level the competitive playing field without undermining the stability of our financial system and economy.”

Hoenig, whose name has been floated as a potential candidate for the post of Federal Reserve vice chairman for supervision, said his plan would create more regulatory efficiency, echoing President Trump’s January executive order to drop two regulations for every new one implemented. Indeed, it theoretically would provide far more than a two-for-one benefit in terms of slashing regulation.

Whether the Trump administration will be open to the idea remains to be seen. Trump himself has said nothing about a return to Glass-Steagall, but the idea was added to the Republican platform last July at the behest of his then campaign manager, Paul Manafort.

On Thursday, Spicer told reporters that reinstating Glass-Steagall was still on the administration’s agenda, but didn’t elaborate on what the president was planning.

Treasury Secretary Steven Mnuchin has also called for a modernized version of the Depression-era law.

“I don’t support going back to Glass-Steagall as is,” Mnuchin said during his confirmation hearing. “What we’ve talked about with the president-elect is perhaps we need a 21st-century Glass-Steagall.”

Hoenig’s proposal specifically calls for “large, complex, universal banks” to house their traditional activities, such as deposits and commercial banking, in intermediate holding companies separate from their nontraditional activities, such as investment banking. Each entity would be subject to independent capital and liquidity requirements, would maintain separate boards of directors, and even be capitalized with separate stocks using “tracking shares.”

Both traditional and investment banking activities would be held under the same bank holding company, Hoenig said, but the parent company would be limited in its ability to offer debt funding to the nontraditional IHC. He suggested a 20% limit of aggregate liabilities between the parent and nontraditional IHC.

A key provision in Hoenig’s proposal is a phased-in 10% leverage ratio — with a payment netting provision or derivatives — for the insured bank. The nontraditional IHC, however, would be subject to a separate capital level depending on its activities — a level that “could be further examined and calibrated.”

An investment bank that includes broker-dealer services, for example, might be capitalized based on the “market’s expectation and perception of risks,” he said, though he noted that whatever the ultimate capital level might be for such a bank, “it should not be less than” existing capital levels for bank-affiliated broker-dealers.

In exchange for the higher capital requirements and separation of commercial and investment banking, Hoenig said, the plan would eliminate many of the post-crisis regulatory requirements. Among those he considered open to revision or simplification are the stress testing regime, orderly liquidation authority and living wills, and various supervisory and prudential requirements authorized by Dodd-Frank.

The ultimate purpose of the proposal, Hoenig said, is to reduce the taxpayers’ potential risks to large banks’ misbehavior by separating the insured banking organization from the riskier activities that banks have been involved in since Gramm-Leach-Bliley was passed in 1999.

“Regulatory relief for the banking industry is worth pursuing,” Hoenig said. “This model allows for many of the synergies of commercial and investment bank activities, it also serves to return the safety net to its original purpose — that of protecting the payments system and the depositor — and reduce the associated moral hazard.”

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Lalita Clozel

Lalita Clozel covers fintech regulation, anti-money-laundering, cybersecurity and the Federal Deposit Insurance Corp. in American Banker's Washington bureau.