WASHINGTON — The U.S. economy would be better off with a system in which there are fewer big financial firms that were at the root of the recent crisis, a top Federal Reserve official signaled on Wednesday.
In a speech at the U.S. Chamber of Commerce, Federal Reserve Bank of Kansas City president Thomas Hoenig endorsed a proposal that could force large banks to get rid of divisions that make risky bets with their capital.
“I suggest that our economy would be better served by a more diverse financial system,” Hoenig said. The growth of big financial companies to a level where they pose a threat to the overall economy has distorted the financial system, the Fed veteran added.
Hoenig, who votes on the Fed’s policy-setting committee, said financial holding companies should be banned from proprietary trading and from investing or sponsoring hedge funds.
Trading and private equity investment should be housed in “separately capitalized subsidiaries subject to strict leverage and concentration limitations,” he said.
That’s the essence of the so-called Volcker rule, a proposal made by former Fed Chairman Paul Volcker, now a top adviser for President Barack Obama, that was approved by the Senate Banking Committee on Monday as part of a wider financial overhaul.
Hoenig, whose district includes Colorado, said he “couldn’t agree more” with the statement often heard from policy makers and financial-market experts over the past few years that if a financial firm is too big to fail, then it is too big.
