The president of the Federal Reserve Bank of Kansas City, Thomas Hoenig, said Wednesday that the so-called Volcker Rule — a proposal to ban banks from proprietary trading and investing or sponsoring hedge funds — is essential to end "too big to fail."

In a speech before the U.S. Chamber of Commerce, Hoenig also emphasized that Fed supervision of banks was essential to monetary policy while a reform bill must give the government resolution powers over systemically important firms.

"A credible resolution process, simple rules for leverage and loan-to-value limits and the Volcker Rule reforms will allow all banks to compete on an equitable basis. In the end, reinstating these fundamental principles will enhance consumer, business and Main Street access to the most essential resource — capital," he said.

While Senate Banking Committee Chairman Chris Dodd's reform bill would leave the Fed in charge of bank holding companies with more than $50 billion of assets — leaving some Fed banks, like Hoenig's, without any institutions to supervise — the Kansas City Fed chief said that would be a mistake.

"That would be extremely harmful for the country," he said. "I think it would be extremely harmful for our region and I think it would be extremely harmful for the input that is provided into the monetary policy."

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