thomas m hoenig : financial reform – post crisis? speech by mr thomas m hoenig, president of the federal reserve bank of kansas city, at women in housing and finance, washington dc, 23 february 2011. * * * thank you for inviting me here today to address this outstanding organization. it is my pleasure to do so. my remarks are entitled “ financial reform : post crisis? ” and will address financial regulatory reform and too big to fail. like most americans, i am a strong defender of free market capitalism and i ’ m here today to make an argument that our country should take the difficult steps required to move its financial industry back toward that system. i acknowledge that there is more than one view on this topic. there are those who believe we have made great strides with dodd - frank and if we implement it well, all will be fine. some believe that that the industry is over - regulated, which may be true, but we should not confuse over - regulated with well - regulated. and some of us are certain that in spite of all that ’ s been done and debated, the soundness of the largest financial institutions and the systemic risks they continue to pose is no better. in my view, it is even worse than before the crisis. as well - intentioned as the dodd - frank act may be, it will not improve outcomes. today i will describe why i believe that is the case and, more importantly, what must be done to give the united states a financial system that is healthy and competitive, and that supports rather than endangers the economy. there are many villains in the story of the recent crisis and much written to name them, describe them and even curse them. if you want to know how it happened, read “ thirteen bankers ” and “ all the devils are here. ” if you want to know how to fix the problem, i highly recommend “ regulating wall street, ” from new york university ’ s stern school of business. if you want to understand why the american public refuses to ignore the injustices associated with executive compensation in bailed out companies versus budget cuts borne by the middle class, read rolling stone ’ s article “ why isn ’ t wall street in jail? ” if you wonder why “ no one saw it coming ” then i suggest you read up on brooksley born or, a decade later, meredith whitney. or, you might even read the remarks of an iowa - educated bank regulator turned - policy maker in kansas

remains? for me, the answer is firm : they must be broken up. we must not allow organizations operating under the safety net to pursue high - risk activities and we cannot let large organizations put our financial system at risk. protected institutions must be limited in their risk activities because there is no end to their appetite for risk and no perceived end to the public purse that protects them. as we have seen in this crisis, size and expanded activities have not led to better and more diversified firms as many once argued, but instead have created very large firms with very similar risk profiles that closely mirror the overall financial system and economy. the serious problems that too - big - to - fail organizations encountered in this crisis provide clear evidence that some have reached a level of complexity and size that defies good management and operational efficiency. a number of financial analysts have even argued that the separate parts of most too - big - to - fail firms would add up to a value much larger than each firm in its entirety. some have suggested that we should limit the overall size of a banking or financial organization, much like we do now with the 10 percent nationwide deposit cap. there were some failed efforts to include a size or funding cap in dodd - frank, but i agree it would be difficult to figure out a good way to restrict size. having said that, real opportunities were missed to deal with size issues during the crisis. in the heat of the moment, rather than break firms into smaller more manageable firms, even the weakest u. s. organizations were allowed to acquire major entities that failed or needed assistance during the crisis. this compounded the too big to fail problem in an already concentrated financial industry. instead of taking important steps to restructure these firms or resolving them as failures, regulators were required to turn their attention to such side issues as executive bonuses and how troubled institutions could be forced to lend more. to me the evidence is overwhelming, we should vigorously pursue the restructuring of these firms in a manner that mitigates risk and that would influence the size and complexity of these firms. that is, we must expand the volcker rule and carve out business lines that are bis central bankers ’ speeches not essential to the basic business of commercial banking or consistent with public safety nets and then require that these lines be spun off into separate firms. in the excellent book, “ regulating wall street, ” several of the studies indicate that there are few synergies among financial activities that could lead to economies of scope