NEW YORK – “Hard leverage rules” for banks must be established, Federal Reserve Bank of Kansas City President Thomas Hoenig today told a subcommittee of the
House Financial Services Committee on the systematic increase in debt and leverage in the economy.
“I strongly support establishing hard leverage rules that are simple, understandable and enforceable and that apply equally to all banking organizations that operate in the United States,” he said, according to text of his testimony, which was released by the Fed.
“As we saw in the years before the crisis, leverage tends to rise during economic expansions as past mistakes are forgotten, and pressure for growth and higher return on equity mounts. Straightforward leverage and underwriting rules require bankers to match increases in assets with increases in capital and prevent disputes with bank examiners over interpretations of the rules. As a result, excess is constrained, and a countercyclical force is created that moderates booms and forms a cushion when the next recession occurs,” he said.
Had similar rules been in place, before the recent crisis, Hoenig said, “we would have been spared a good part of the tremendous hardship the American people have gone through during the past two years. Critics of more conservative capital ratios say this will restrict growth. Yes, it will. The success of the U.S. economy is not the result of the size of financial institutions but the strength of the financial system.”
