Thomas Hoenig, president of the Kansas City Federal Reserve Bank, said on Wednesday U.S. financial reform should include some form of the Volcker rule, which would limit large financial firms' ability to engage in speculative trading.
Hoenig, among a small minority of Fed officials to openly call for banks deemed too big to fail to be broken up, argued the country's mammoth investment conglomerates had not served the broader economy well.
Adopting a version of the proposed Volcker rule would be healthy for long-term stability, Hoenig told a conference sponsored by the U.S. Chamber of Commerce. We have seen the formation of a powerful group of financial firms.
Hoenig said some of the push toward deregulation during the 1990s had been detrimental to financial stability, and needed to be reversed.
In particular, he said big financial holding companies should not be allowed to trade for their own accounts, so-called proprietary trading, and be forbidden to invest in or sponsor its own hedge funds.
He also stressed the need for greater transparency in derivatives markets, which many blame for bringing the global financial system to the brink of collapse in late 2008.
Hoenig supported efforts to give regulators the authority to wind down big financial companies in an orderly fashion, but said current proposals left too much at the discretion of the political process. There is considerable room for exception in the hands of the Treasury, he said. This needs more attention.
He added the implicit guarantee by government of the dominant banking interests gave them an unfair advantage in the market, including cheaper borrowing costs and higher credit ratings.