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From Banking and Finance Law Daily, March 14, 2017

Hoenig proposes more stability through use of intermediate holding companies

By Richard A. Roth, J.D.

The best path to simultaneously end too-big-to-fail and provide regulatory relief is the use of intermediate holding companies, according to Federal Deposit Insurance Corporation Thomas M. Hoenig. He proposed a system that would require nontraditional banking activities to be restricted to separately capitalized intermediate holding companies in remarks prepared for the Institute of International Bankers Annual Washington Conference.

Under Hoenig’s plan, large, complex, universal banks would operate as financial holding companies that would establish separate intermediate holding companies for different activities. Traditional banking activities, such as accepting deposits and making loans, would be carried out by bank intermediate holding companies (BIHCs), while nontraditional banking activities, such as insurance, securities, and investment activities, would be carried out by nontraditional intermediate holding companies (NIHCs).

Capital. Capital requirements took up much of Hoenig’s remarks. BIHCs and insured depository subsidiaries would be required to maintain a tangible-equity-to-assets ratio of at least 10 percent. There would be a 10-percent floor on the ratio for NIHCs and the parent company, but higher ratios might be called for based on market expectations and the risk to the public safety net, Hoenig said. NIHCs would be required to hold capital levels that at least matched the capital held by competitors that were not affiliated with banking institutions.

Hoenig took the opportunity to criticize emphatically complaints that higher capital levels are harmful. To the contrary, he said—the data show that higher capital levels encourage lending generally and support ongoing lending during periods of stress. The higher capital levels required since the financial crisis have been accompanied by increased lending and increased bank earnings.

Even now, the largest financial firms have tangible-equity-to-assets ratios that are not high enough to weather losses similar to what were suffered in 2008 without a bailout, he warned.

Resolvability. The plan would include aspects intended to ensure the resolvability of NIHCs. These would include liquidity requirements and heightened restrictions on transactions with affiliates, including with the parent company.

NIHCs would need to be structured so that, in the case of failure, they could be resolved through bankruptcy.

Regulatory relief. NIHCs and increased capital ratios would clear the way for significant regulatory relief even for the largest, most complex banking companies, Hoenig predicted. Dodd-Frank Act requirements related to risk-based capital and liquidity, stress tests, the Federal Reserve Board’s annual Comprehensive Capital Analysis and Review, living wills, and the FDIC’s orderly liquidation authority all could be simplified or eliminated.

Even the Volcker Rule could be eased, he said. Relationships with private equity or hedge funds, which currently are banned, would be permitted if they were activities of properly regulated and capitalized NIHCs.

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