Despite Dodd-Frank Act, community banks face ‘higher costs of capital’: Hoenig
Over 6,500 U.S. community banks may continue to face “higher costs of capital” than their big bank rivals even after a sweeping bank reform law has sought to end the ‘too-big-to-fail’ perception, Federal Reserve Bank of Kansas City President Thomas Hoenig said Monday.
“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,” Hoenig told a group gathering at a House Oversight and Investigations subcommittee field hearing in Overland Park, Kan.
“Despite the provisions of the Dodd-Frank Act to end too-big-to-fail, community banks will continue to face higher costs of capital and deposits until investors are convinced it has ended,” Hoenig said.
Hoenig said that the most lasting threat to the survival of community banks is whether they will continue to be placed at a competitive disadvantage to their larger rivals.
At issue is a provision in the Dodd-Frank Act — the name of the historic bank reform legislation that became law in July — that seeks to dismantle a failing Lehman-like mega-bank so its collapse wouldn’t damage the markets.
The statute requires that taxpayer funds are employed, in part, to make payouts to counterparts of a failing big bank so that they don’t fail as well and create a credit contagion. Afterwards, the statute requires that the government recoup the costs to taxpayers by assessing a fee on big financial institutions.
However, at a town hall meeting in Lincoln, Neb. on Aug. 13, Hoenig argued that the process for government regulators to decide that a mega-bank needs to be resolved is complex, challenging and could be time-consuming for regulators that likely will be required to act quickly to avoid an expanding crisis.
“The process for taking this action is complex, requiring multiple regulatory parties to agree, the Treasury Secretary making the final determination with the President’s concurrence, and a court ruling that the action isn’t arbitrary and capricious,” Hoenig said at the Nebraska meeting.
He continued: “This will be an incredible challenge for the regulatory agencies. Recent experience tells us that time is of the essence in a national liquidity crisis. It will be extremely difficult in practice to designate the largest institutions as insolvent, take them over and liquidate. The simple truth is “too-big-to-fail” will not go away easily.”
At Monday’s speech in Overland park, Hoenig also argued that community banks will survive the crisis and recession and continue to play a key role as the economy recovers. “They [community banks] have survived and prospered,” Hoenig said. “If allowed to compete on a fair and level playing field, the community bank model is a winner.”
By Ronald D. Orol
Tags: banking sector, big banks, Capital economics, Federal Reserve, financial institutions, investors, recession, taxpayers
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