Thomas Hoenig, director of the Federal Deposit Insurance Corporation (FDIC) said in a speech in New York today that there remains significant risk that the public will once again have to “pick up the pieces when the next financial setback occurs.” Notice, he said “when,” not “if.”
Hoenig has made the point before that capital requirements for “too big too fail” banks should be based on the ratio of tangible equity to tangible assets, not the Basel requirement of total capitl to risk-weighted assets. He notes that based on the tangible equity measure, in 2007 the 10 largest U.S. financial firms held a tiny 2.8% of capital to guard against a sudden shock. Measured by Basel requirements, the banks held a much healthier 11% capital cushion. You may recall that the cushion provided little padding in the event.
Hoenig suggests a 10% capital requirement, based on a measure of tangible equity to tangible assets going forward. His argument is a simple one, “When the public and the market are at risk, they demand more — not less — capital.
The full text of Hoenig’s remarks are available here.