Federal Reserve Jackson Hole Economic Symposium...Thomas Hoenig, vice chairman of the Federal Deposit Insurance Corp. (FDIC), listens during a Bloomberg television interview during the Jackson Hole economic symposium, sponsored by the Federal Reserve Bank of Kansas City, at the Jackson Lake Lodge in Moran, Wyoming, U.S., on Thursday, Aug. 27, 2015. Hoenig discussed the implementation of the Dodd-Frank banking regulation and industry outlook. Photographer: David Paul Morris/Bloomberg
Thomas Hoenig © Bloomberg

A top US regulator has endorsed Donald Trump’s tentative plans to reinstate barriers between investment banking and consumer banking, arguing the divisions are vital to ensure that shareholders, and not the taxpayer, foot the bill for “inevitable” collapses.

Since taking office two months ago the president has said that he favours some kind of firewall between commercial banking and the trading of securities and derivatives, as he looks to revamp the regulatory framework put in place since the 2008 financial crisis.

Mr Trump’s Treasury secretary, Steven Mnuchin, said during his confirmation hearing that he, too, backed a “21st century version” of Glass-Steagall, alluding to the Depression-era law that separated commercial from investment banking.

The law was repealed in 1999 under president Bill Clinton, paving the way to the megamergers of the early 2000s during which a whole host of banking services were offered under one roof.

In a speech on Monday, Thomas Hoenig, vice-chairman of the Federal Deposit Insurance Corporation, threw his weight behind the idea of separation, saying that universal banks should set up standalone holding companies if they wanted to carry out “non-traditional bank activities”.

Each holding company would become a separate affiliate over a period of about three years, he said, separately capitalised and separately managed from the FDIC-insured bank. Provided that insured bank had equity capital of at least 10 per cent of assets, Mr Hoenig said, it could be relieved from some of the burdens of the Dodd-Frank Act of 2010. Capital levels at uninsured affiliates, meanwhile, would be left to the market to decide.

Reforms must be “grounded in capitalism that permits failure . . . while maintaining the safety and soundness of the economic and financial system overall,” he said.

“While this model allows for many of the synergies of commercial and investment bank activities, it also serves to return the safety net to its original purpose — that of protecting the payments system and the depositor — and reduce the associated moral hazard.”

The speech drew instant applause from Better Markets, an advocacy group which has long campaigned for tougher standards on the banks. Dennis Kelleher, president and chief executive, said he hoped the “serious, comprehensive, fact-based and deeply thoughtful” speech received “the widest consideration by all those . . . with the public duty to protect America’s families from another financial and economic catastrophe like 2008.”

But the proposal is likely to spark alarm on Wall Street, where the likes of JPMorgan Chase, Bank of America and Citigroup have argued that break-ups of big banking groups would be arduous and unnecessary.

Lobbyists for the banks note that the institutions that fared the worst during the last crisis were monoline commercial banks such as Countrywide and Washington Mutual, and monoline investment banks like Bear Stearns and Lehman Brothers.

They also note that since the last crisis the Federal Reserve has effectively cemented ties between commercial and investment banks, overseeing mergers such as Merrill Lynch into BofA while bringing Goldman Sachs and Morgan Stanley, the remaining standalone investment banks, under much closer supervision.

Others cautioned that the proposal may not gain much traction on Capitol Hill. Ian Katz, an analyst at Capital Alpha, said it would require legislation at a time when Washington seems more keen on tackling healthcare and tax reform, then perhaps infrastructure. Only then, he said, would lawmakers turn to measures that ease existing rules on banks, rather than adding new ones.

Last week Sean Spicer, the president’s spokesman, said Mr Trump remained “committed” to reviving Glass-Steagall in some form. He did not offer any details.

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