Big Banks Have to 'Want' Better Living Wills: FDIC's Hoenig

WASHINGTON — Thomas Hoenig, the Federal Deposit Insurance Corp.'s vice chairman, sounded optimistic Tuesday that the biggest banks can improve their "living wills" to regulators' satisfaction. But they have to want to, he said.

"They have the talent, they have the knowledge and they have the resources, so, yeah, I think they can do reasonably good. Now whether they want to, that's another issue," Hoenig said at the American Banker Regulatory Symposium.

Responding to questions on a range of issues, Hoenig reiterated a stark warning that large banks could face repercussions if their resolution plans are not up to snuff by mid-2015. He said policymakers should not over-rely on a new FDIC resolution facility for large firms created by the Dodd-Frank Act. Hoenig also suggested that banks have been sluggish in improving their capital.

The Dodd-Frank Act provided two options for unwinding failed financial behemoths. Under Title I of the law, banks with over $50 billion in assets must submit and update living wills to prove they could be smoothly unwound through a traditional bankruptcy.

But last month, the FDIC and Federal Reserve Board heavily criticized the 2013 resolution plans of the 11 most complex institutions. The agencies said their living wills must meet regulatory expectations next year, or it is likely the plans will be deemed "not credible." Under Dodd-Frank, that designation would open banks to increase regulatory scrutiny. If regulators are still unhappy with a bank's revisions, it could ultimately be forced to divest assets to become more resolvable.

Though Hoenig said he expected banks could meet the agencies' standards by next year, he said they should not discount the implications for failing to do so.

If the agencies are not satisfied, the banks "will be subject to the findings of being non-credible and then the supervision begins and that's a very serious step," Hoenig said.

The second resolution option under Dodd-Frank is, in cases where the government believes a failing firm could not go bankrupt without wrecking the economy, to appoint the FDIC as receiver to manage an orderly failure. The FDIC's stated resolution strategy would be to house the parent's subsidiaries in a bridge company until a new firm can be recapitalized. The agency has the option to use Treasury Department financing to run the resolution. (The new FDIC facility was mandated under Title II of the law.)

Hoenig has argued that banks have not yet drafted sufficient resolution plans in part because they have been too focused on Title II.

There was "a lot of early concentration on Title II. I think people took their eye off the ball... We're finally getting to that point where we understand that there are distinct titles that require distinct different approaches as we think about crisis, solvency and liquidity," Hoenig said. "If we're not going to use Title I as intended, then repeal it and treat them as [Government Sponsored Enterprises]... and that's really the decision we're making. Is this a market driven economic sector or is this a public utility? And I think it should be market driven."

But Hoenig spent most of his time saying he remains dissatisfied with the capital ratios at large banks. He said that if a majority of the banks focused on increasing and maintaining high levels of capital and liquidity, then the few banks that face insolvency could do so through the traditional bankruptcy system rather than through the government.

"You will have idiosyncratic failures and you can manage that through bankruptcy. But it's when they all have very low capital levels and they all have very little liquidity behind that" when it becomes a systemic concern, Hoenig said. "And to me liquidity always is a consequence of uncertainty of insolvency. It's not the cause of insolvency; it's a consequence of insolvency."