WASHINGTON – Federal Deposit Insurance Corp. Vice Chairman Thomas Hoenig reiterated his strong opposition Wednesday to a Federal Reserve Board proposal that would direct large banks to raise additional unsecured debt as a cushion against a potential failure.
The former Kansas City Fed president argued that the central bank's "total loss absorbing capacity" plan would only serve to weaken banks by increasing leverage.
A "blanket rule mandating TLAC – which requires financial firms to issue substantial additional debt and which increases the leverage in an already highly leveraged industry – should only be embraced with great reluctance," Hoenig said in prepared remarks to be delivered Wednesday at the Peterson Institute for International Economics.
The Fed released its long-awaited plan on Oct. 30 to require global systemically important banks, or G-SIBs, to hold a combination of debt and equity that would act as a buffer to prevent another bailout if the bank were to become insolvent. The proposal would also require that the banks issue a minimum amount of unsecured long-term debt that could be converted to equity as part of the TLAC calculation.
But Hoenig contended that TLAC would impose a one-size-fits-all approach to differently structured G-SIBs. By one estimate, Wells Fargo would have to raise the most debt under TLAC than any of the other G-SIB, even though it earned better feedback than its peers for its 2014 resolution plan, Hoenig noted.
The higher debt levels could also push banks to adopt risky behaviors in order to meet heightened debt requirements, he said.
"TLAC, as it is applied broadly to the industry, would necessarily affect leverage and in some instances place pressure on firms to change their business model," he said. "In doing so, it also would encourage the industry and firms to add risks that may be inconsistent with conventional safety and soundness principles or what they would otherwise pursue."
Banks should instead focus on developing a sound resolution plan that does not involve more leverage, Hoenig said.
"Each firm and its regulators should identify debt and equity requirements that have a neutral effect on the firm and the industry's leverage positions, while also allowing for bankruptcy without public support should a firm fail," he said.
Hoenig also urged regulators to publish the portion of living-will plans that address leverage. This "would enhance the market's role in assuring the right balance within the plans," he said.