There’s a story in Saturday’s Wall Street Journal about the timing of J.P. Morgan’s $2 billion trading loss and how it helps advocates of the Volcker Rule. A similar article appears in today’s American Banker.
Former Federal Reserve Bank of Kansas City President Tom Hoenig, now a director at the FDIC, not only approves of the Volcker Rule, which would curb proprietary trading at commercial banks, but would like to see the largest banks split up in order to separate investment banking from traditional banking. Hoenig has been talking along these lines for quite some time, including at a House subcommittee hearing on Friday. On April 26, he share similar views in Des Moines, telling some 270 bankers that the largest banks should be broken up along six distinct business lines.
“If you look at the largest institutions, there are six lines of business,” he said. “There is the traditional commercial bank. In addition, there is investment banking, there is managing and advising, there are certain kinds of proprietary trading, and broker/dealer activities, and managing investments in trust services.”
Hoenig said the law should segregate these lines of businesses into separate corporations, just as the Glass-Steagall Act separated investment and commercial banking before the Gramm-Leach-Bliley Act was passed in 1999.
Breaking up the largest banks, he said, is not a matter of “getting even,” but a matter of correcting perverse incentives. He said the federal safety net incents the largest institutions to grow and take risks that smaller institutions simply can’t take. Just about the same time Hoenig was making these comments, J.P. Morgan Chase was engaging in highly risky trades that cost $2 billion.
Be sure to read a full report on Hoenig’s April 26 comments in the May 15 edition of NorthWestern Financial Review