thomas m hoenig : back to the business of banking speech by mr thomas m hoenig, president of the federal reserve bank of kansas city, at the 29th annual monetary and trade conference, global interdependence center and drexel university lebow college of business, philadelphia, pennsylvania, 24 may 2011. * * * introduction today ’ s meeting and sessions are about financial reform, and i congratulate the organizers of this conference for keeping this important topic in the mainstream of discussion. much remains to be done around reform if we are to ensure a more stable financial system. topics today will focus on housing, the dodd - frank act, governmentsponsored enterprises ( gses ), the safety net and other reform efforts that necessarily follow the recent financial crisis that has so devastated our national economy. understandably, major financial interests are lobbying to change and mitigate the impact of dodd - frank or influence the reform efforts that will affect the gses. one reform effort, for example, that is especially difficult for some interests to accept is the volcker rule. this rule will restrict banking organizations from engaging in proprietary trading activities and involvement with hedge and private equity funds. it will affect the largest institutions most directly, confining their risk profile and limiting the advantages of leverage that currently drive behavior among these firms. how it is implemented will influence not only the behavior of these firms in the future but the discussion of other reform efforts yet to be undertaken. i strongly support the volcker rule and suggest it should be implemented with resolve and should be strengthened in its reach and impact. over the next few minutes, i want to outline my reasons for this position. supporting my remarks this morning is a more extensive white paper prepared with colleagues at the federal reserve bank of kansas city. this paper is posted on our bank ’ s website, www. kansascityfed. org. a brief history a fundamental characteristic of the united states is that its citizens have an enormous suspicion and distrust of concentrated power – political or financial. for nearly 200 years, state and federal laws placed limits on bank activities and resource concentration, resulting in a relatively open u. s. banking system that has served the country well. in fact, some of the largest institutions in this country started small : the bank of new york, for example, was founded, in part, by alexander hamilton, and the mellon bank was founded by a farm boy who built his own financial empire. thousands of banks, from small community

exempt from this stay. the change meant that all of the complicated and often risky mortgage securities could be used as repo collateral just when the securities were growing rapidly and just prior to the bursting of the housing price bubble. one of the sources of instability during the crisis was repo runs, particularly on repo borrowers using subprime mortgage - related assets as collateral. essentially, these borrowers funded long - term assets of relatively low quality with very short - term liabilities. therefore, to improve the stability of the shadow banking market, the bankruptcy law for repo collateral should be rolled back to the pre - 2005 rules and eliminate the automatic stay exemption for mortgage - related repo collateral. this would discourage such activity and tend to reduce the potential instability that is associated with repo runs. term wholesale funding would continue to be provided by institutional investors such as mutual funds, pension funds and life insurance companies. overall, these changes to the rules for money market funds and repo instruments would increase the stability of the shadow banking system because term lending would be less dependent on “ demandable “ funding and more reliant on term funding, and the pricing of risk would reflect the actual risk incurred. conclusion the proposal i am placing before you today will not take all risks out of the financial system. reasonable risk is, in fact, part of the financial system and essential to our economic success. however, the proposal will improve the stability of the financial system by clarifying where risks reside ; improving the pricing of risk ; and, thus, enhancing the allocation of resources within our economic system. it also will promote a more competitive financial system, as it levels the playing field for all financial institutions. and finally, it will raise the bar of accountability for actions taken and, to an important degree, reduce the likelihood of future bailouts funded by the american taxpayers. bis central bankers ’ speeches