Thomas Hoenig's Three-Step Plan for Better Financial Reform

WASHINGTON — Federal Deposit Insurance Corp. board member Thomas Hoenig resumed his role Thursday of financial reform skeptic.

Addressing a Cato Institute conference on financial policy, Hoenig reiterated his doubts that reforms coming out of the financial crisis have adequately addressed "too big to fail", and pointed to three courses that he said policymakers should take to make the system stronger.

"If you're not skeptical, then I would be disappointed in you," said Hoenig, who is still awaiting Senate confirmation to become the FDIC's vice chairman.

Echoing past speeches, Hoenig said one way to achieve more effective reforms is to spin an institution's riskier broker-dealer activities out of its commercial bank structure to shrink the exposure of the public safety net. Without such a step, he said, behemoths will keep taking big risks, increasing the likelihood that the government would have to back them.

"If we're going to continue with the safety net … then we need to think about narrowing its coverage to what it was intended to cover. … That is a big chore, I realize," Hoenig said. "But if you don't do that, then you are on your way to make them officially public utilities or nationalize them because your safety net is at extreme risk."

Hoenig also reiterated his criticism of the international capital accord known as Basel III, saying officials should scrap Basel for more straightforward minimum requirements that banks maintain a tangible capital ratio.

Basel is "too complicated and too easily gamed," he said. "We ought to have a measure that's easily calculated, understood and enforced, and has clarity, and that's a tangible capital ratio. That's all that matters in a crisis. If you ask most fixed-income managers what they look at, it's tangible capital."

The third step, Hoenig said, is to strengthen regulators' ability to assess the risk of banks' portfolio and therefore the quality of their capital.

"You need to reestablish bank supervision as a tool … to identify risk," he said. "I think today it skims the surface only. There are methods, and not just the stress tests. There are methods to examine the quality of the assets by sampling across the industry, estimating what the condition of those firms are and then assessing additional capital should they have a higher risk profile. There are ways that we do that now, and we could do it more … if we decide to use that tool more vigorously than we have in the past."