FDIC’s Hoenig Says Banks May Revisit Pre-2008 Risky Behavior

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http://www.bloomberg.com/news/2012-09-19/fdic-s-hoenig-says-banks-may-return-to-pre-2008-risky-behaviors.html

If big U.S. banks are not forced to sever their investment arms from traditional banking, they will return to behavior that led to the 2008 credit crisis, said Federal Deposit Insurance Corp. board member Thomas Hoenig.

“The behavior and practices leading to this crisis will soon reemerge and these highly complex, more vulnerable firms will have an even more devastating effect on the economy,” Hoenig said in remarks yesterday at the Exchequer Club in Washington. “Activities leading to the crisis continue today -- and continue to be subsidized -- well after the lessons should have been learned.”

Regulators should reinstate a separation between commercial banking and brokerages, a kind of “modern version” of the Glass-Steagall Act to separate commercial banking from brokerage operations, Hoenig has argued since before joining the FDIC in April. The public safety net should not protect the banking industry’s trading risks, according to the former Federal Reserve Bank of Kansas City president.

Hoenig said major banks have “misled the markets regarding interest rates” and that “firms using FDIC-insured funds continue to make directional bets on asset values and global events.”