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FDIC's Hoenig: A Myth That Capital Undermines Growth (Audio) · Bloomberg Intelligence

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  Speaker 1: co host Kathleen Hayes on site in Jackson Hole, Wyoming.
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  Speaker 1: Joining us now is Thomas Hanneck. He is Vice chairman
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  Speaker 1: of the Federal Deposit Insurance Corporation. He was formerly the
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  Speaker 1: eighth Chief Executive of the tenth District Federal Reserve Bank
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  Speaker 1: in Kansas City, and he served as a voting member
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  Speaker 1: of the Federal Open Market Committee. And he joins us now.
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  Speaker 1: Mr Hannick, what if you could comment on the banking
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  Speaker 1: situation as it relates to capital reserves and whether there
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  Speaker 1: is any contradiction between the desire to have banks lend
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  Speaker 1: money in a low interest rate environment on the one hand,
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  Speaker 1: but on the other hold them to higher capital standards
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  Speaker 1: which may indeed prevent them from lending the very money
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  Speaker 1: you hope to get into the system. Well, that's a
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  Speaker 1: very good question. And thank you for having me on
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  Speaker 1: your program. And let me begin by telling you that
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  Speaker 1: capital is not a reserve. Capital is lendable funds. And
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  Speaker 1: what we're trying to do is make sure that there
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  Speaker 1: is enough ownership capital, that is, enough ownership funds lending
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  Speaker 1: out there that makes the financial system safer. What you
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  Speaker 1: do and what the objective is when you allow your
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  Speaker 1: capital levels to fall, that is your ownership interest to fall,
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  Speaker 1: is you're allowing that ownership to leverage up their position,
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  Speaker 1: increasing the risk of the institution. And so should it
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  Speaker 1: run into difficulty, it has less margin for air, less
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  Speaker 1: margin for mistakes, and that can precipitate a downturn in
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  Speaker 1: the economy or in the precipitative crisis, as we've learned
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  Speaker 1: in the last crisis. So capital is very useful in
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  Speaker 1: terms of holding people responsible for the quality of the institution,
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  Speaker 1: and I think it has a very positive outcome. Let
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  Speaker 1: me also note for you that um those institutions, there's
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  Speaker 1: increasing evidence of recent study by the Followers Bank of
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  Speaker 1: New York as a matter of fact, that UH and
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  Speaker 1: also by the b I S that institutions that have
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  Speaker 1: higher capital levels are able to continue to lend during
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  Speaker 1: the downturn because they don't have the pressure to keep
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  Speaker 1: their capital ratios, that is the amount of capital they
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  Speaker 1: have two assets, uh to unusually to higher levels, are
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  Speaker 1: to the same levels as they increase their losses, and
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  Speaker 1: they can hold their customers and keep their customers funded
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  Speaker 1: during that period, and that helps mitigate the crisis. So
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  Speaker 1: capital is actually a very good thing, um, and I
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  Speaker 1: think to call it a reserve as if you put
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  Speaker 1: it aside or something is a mistake. Is lendable funds
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  Speaker 1: very productive, just like any other form of lendable funds
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  Speaker 1: and we need to keep that in mind well, of course,
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  Speaker 1: and of course PIM prefaces with the idea I think
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  Speaker 1: remplicitly that this makes it makes it harder for banks
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  Speaker 1: to lend and it is a drag on growth. Uh.
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  Speaker 1: Do you disagree with that? Is it, more broadly just
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  Speaker 1: too much regulation from Dodd? Frank, I absolutely disagree with that.
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  Speaker 1: Capital is proven to be Let me, let me just
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  Speaker 1: give you an example of where you were wrong under
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  Speaker 1: under a highly leveraged situation where you use risk based
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  Speaker 1: capital and you say, all right, these are low risk
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  Speaker 1: sovereign depth rest loans and so forth, so you lend
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  Speaker 1: to those people because there's no capital requirement there and
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  Speaker 1: loans who you have to hold more capital against you say, uh,
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  Speaker 1: they go unfunded, although they may be the better return uh,
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  Speaker 1: and therefore facilitate growth. And like I said, we've learned
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  Speaker 1: over and over again and that institutions that are well
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  Speaker 1: capitalized usually compete better. They can take on risk more
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  Speaker 1: aggressively because they have more capital, they can afford to
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  Speaker 1: make the mistake, and therefore it turns out to be
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  Speaker 1: much more supportive. And in fact, the b I S
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  Speaker 1: and its studies show that with higher capital levels we
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  Speaker 1: saw increases in lending, not decreases. So this, this myth
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  Speaker 1: that requiring capital is a bad thing is hurting the
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  Speaker 1: economy in the long run. It makes it less stable,
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  Speaker 1: more susceptible to contagion because when you have more capital,
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  Speaker 1: if one bank fails, it doesn't have to spill over
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  Speaker 1: to the next. Uh. Those are all things that capital
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  Speaker 1: serves purpose for. And I think it's, like I say,
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  Speaker 1: a myth to say that capital undermines growth in the economy. Um,
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  Speaker 1: now that doesn't mean you can't have borrowing, you shouldn't
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  Speaker 1: have leverage. That's very much a part of any economic
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  Speaker 1: situation or any economic growth, uh concept. At the same time,
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  Speaker 1: too little capital is destabilizing, and that's what you have
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  Speaker 1: to keep in mind. Mr har No no no no.
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  Speaker 1: Are just gonna say if you could comment on what
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  Speaker 1: you see as some of the fundamental issues facing the
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  Speaker 1: international banking system, particularly banks in Europe. Well, Europe has
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  Speaker 1: a couple of things going on. They first of all,
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  Speaker 1: tend to have less tangible capital than US banks, not
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  Speaker 1: a whole lot less, but less capital. And they have
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  Speaker 1: more as i'm as I read the i m F
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  Speaker 1: type reports, they have more legacy problem assets that they
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  Speaker 1: have to continue to deal with. And so that that's
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  Speaker 1: you know, that's a bad combination. That's capital more legacy
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  Speaker 1: problem assets, and you that that constricts your ability to
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  Speaker 1: lend and to grow. And I think we're seeing some
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  Speaker 1: of that effect Europe at this point. I think should
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  Speaker 1: they continue to weaken their capital in the name of growth,
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  Speaker 1: I think they'll actually have a perverse effect of actually
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  Speaker 1: waking their growth in the long run. But those are
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  Speaker 1: decisions they have. I think the United States has gained
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  Speaker 1: market share I'm told is that read the Financial Times
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  Speaker 1: because we as a as an industry in this part
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  Speaker 1: of the world are competing from a stronger position, that is,
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  Speaker 1: more capital, and I think that served this well and
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  Speaker 1: I think they should perhaps um look at that and
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  Speaker 1: see how that might infect improve their situation with more
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  Speaker 1: capital and working through their legacy problem assets tom uh
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  Speaker 1: Italian banks, non performing loans, many dark clouds homing hanging
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  Speaker 1: over their banks. I can understand how to maybe certainly
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  Speaker 1: an issue for Italy it's financial system and economy broadly
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  Speaker 1: within the OW area, and for the ECB on its
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  Speaker 1: problem or worry list. What about for the United States? Though?
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  Speaker 1: Is there any kind of financial risk from Europe? Europe's
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  Speaker 1: banking problems which are getting more and more attention, and
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  Speaker 1: our financial system in our markets, well, I think there's
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  Speaker 1: always the issue of contagion across continents because they're inner
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  Speaker 1: inter linked, not only with trade but with financial capital
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  Speaker 1: flows and so forth, so we have to be mindful
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  Speaker 1: of that. I think the US banks are pretty well
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  Speaker 1: positioned to uh handle some of that more successfully than
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  Speaker 1: say other countries, because we do have a little not
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  Speaker 1: a little, We do have a stronger capital position. I
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  Speaker 1: have argued and continue to argue our capital needs to
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  Speaker 1: be stronger. Yet that that would only help us in
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  Speaker 1: the long run. UM, But we are better positioned than
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  Speaker 1: other countries to withstand. We have less exposure to it
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  Speaker 1: number one, we have stronger capital number two, and I
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  Speaker 1: think those are big advantages over the long run. Mr Hannag,
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  Speaker 1: I want to just pick up on this idea of
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  Speaker 1: perhaps a relative world. UM. We've had many guests on
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  Speaker 1: the program who say that the bond market is currently distorted,
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  Speaker 1: that because of the relative high yield of US treasuries,
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  Speaker 1: money is flowing into treasuries for all the wrong reasons.
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  Speaker 1: What are your thoughts about distortion and bond interest rates
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  Speaker 1: and why bond prices have been going higher and higher. Well,
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  Speaker 1: there's a many, many elements of distortions. One of the
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  Speaker 1: elements of distortions is unusually low interest rates for eight
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  Speaker 1: years year interest rates are not normal under any definition
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  Speaker 1: of normal. This causes a reallocation of capital, movement of capital.
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  Speaker 1: And then you then, I use the often comparison of
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  Speaker 1: if you're grading on a curve the dollar and the
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  Speaker 1: US financial system is relatively stronger. Where do you put
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  Speaker 1: your money when you're uncertain? You put it where you
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  Speaker 1: have the greatest confidence, and that's in the us still.
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  Speaker 1: So those are the things that are affecting us. I
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  Speaker 1: want to ask you just one final question, Tom about
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  Speaker 1: bank regulations. This is an election year. There's all in
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  Speaker 1: the talk, and there's been talking last years more regulation,
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  Speaker 1: you know, put more regulation on, no, no, no, pull
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  Speaker 1: back last eagle. You're the vice chair of the f
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  Speaker 1: d i C. What do you think about what is
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  Speaker 1: needed or not needed? Now? Well, I think that's a
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  Speaker 1: very good question. I think um number one, that the
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  Speaker 1: largest institutions are incredibly large. They are too big to fail.
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  Speaker 1: We're not going to solve that time that anytime soon.
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  Speaker 1: And I think with that environment, you're going to have
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  Speaker 1: more regulation. Do we need more regular, more regulation to
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  Speaker 1: what we already have? The answers, No, we have tons
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  Speaker 1: of regulation. One of the things that I'm proposing is
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  Speaker 1: for what I refer to as simpler banks, more traditional
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  Speaker 1: banks where you're lending basically and taking deposits and not
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  Speaker 1: in the investment banking broken bank, that you really do
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  Speaker 1: get some substantial regulatory relief in place around capital, around lending,
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  Speaker 1: qualified mortgages, and so forth. And we do need to
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  Speaker 1: think about how we take some of this burden off
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  Speaker 1: the regional and smaller banks UH as soon as we can.
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  Speaker 1: Tom Hanig, thank you so very much. We're gonna have
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  Speaker 1: to come back and continue this conversation. Tom Hanig is
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  Speaker 1: the former president of the Federalist of Bank of Kansas City.
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  Speaker 1: He is the vice chair of the Federal Deposit Insurance Corporation.
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  Speaker 1: This is Bloomberg.