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1 The Wall Street Journal WSJ Pro Financial Regulation Inaugural Event: A Discussion with Thomas M. Hoenig Speaker: Thomas M. Hoenig, Vice Chairman, Federal Deposit Insurance Corporation (FDIC) Interviewer: Jacob M. Schlesinger, Financial Regulation Editor The Wall Street Journal Location: Horizon Ballroom, Ronald Reagan Building and International Trade Center, Washington Time: 8:30 EDT Date: Wednesday, March 16, 2016 Transcript By Superior Transcriptions LLC JACOB SCHLESINGER: So we all knew that when we scheduled this event today we would probably be talking a lot about systemic risk. What we didn t know was that it was the Washington Metropolitan Area Transit Authority s system that we d be talking about.

2 So, first of all, I want to thank all of you, both the people who helped set up and all the guests, for making the time in today s challenging commute to get here. It s a big day in Washington. As you probably know, today, this afternoon, the Federal Reserve s Open Market Committee is announcing their monetary policy results. President Obama just announced that at 11:00 he s going to reveal his Supreme Court nominee. And of course, we have our inaugural WSJ Pro Financial Regulation event, and we appreciate your making it here for that. A couple of housekeeping matters. We re going to talk up here, the two of us, for about half an hour.

3 And then, as Craig mentioned, we re going to open it up to questions. We re going to wrap up the discussion about 9:30, and then we invite those in the audience to stay for coffee and food and networking till about 10:00. And if you re tweeting, please make sure to use #WSJPro. First, just a brief introduction. There are very few people on this planet who manage to win praise from both Elizabeth Warren and The Wall Street Journal Editorial Page, and today s distinguished guest is one of them. Tom Hoenig has the right approach to financial regulation, we quoted the Massachusetts Democratic senator as saying about him in a September 2014 profile that we did.

4 And I count at least four Journal editorials praising the vice chairman of the Federal Deposit Insurance Corporation in his four years in that office offering him kudos for sanity and wisdom. In that profile that we did from two years ago, we described Mr. Hoenig as a Vietnam War veteran and son of a plumber from Fort Madison, Iowa, who served for decades as a bank supervisor for the Kansas City Federal Reserve, where he helped administer more than 100 bank failures experiences that helped shape his views for years to come on the importance of bank safety and soundness. Tom went on to serve as president of the Kansas City Fed for two decades, until 2011, and we described him in that job as a consistent thorn in Ben Bernanke s side for voting eight times in 2010 against the Fed s majority decision to maintain an easy money policy.

5 He s gone on in his current job to be a bit of a thorn in the side of big banks as well, advocating unsuccessfully that they be broken up, and more successfully for higher capital requirements to help protect against another crisis. He also hasn t been shy about publicly taking on fellow regulators when he disagrees with them, whether it s the Fed, the chairman of the Commodity Futures Trading Commission, or the people in Basel, Switzerland. In short, Tom Hoenig is not a man to pull his punches, and we re lucky to have him here for what I hope will be a frank and lively discussion. I d like to start by noting that today, actually, is the eighth anniversary of what was arguably the beginning of the great financial crisis.

6 It was on March 16th, 2008 a Sunday that year that a collapsing Bear Stearns agreed to be purchased by Morgan for $2 a share, or 1% of its peak value from about a year earlier. So let s start by let me start by asking you this: If you look back at the changes that were made in the wake of the crisis, you ve said, including in a speech last November in Chicago, quote, Progress has been made in strengthening our financial institutions, but it s been modest at best. So help us understand just how much you would judge the efforts to date. On a scale of one to 10 one being where we were in 2007, 10 being where we d be if Tom Hoenig were the solo czar of financial regulation so what number would you put on the level of safety and soundness in the current financial system in the current regulatory regime?

7 VICE CHAIRMAN THOMAS HOENIG: (Laughs.) Well, I d probably put about a four on that scale. And the reasons are that I ve been told probably a thousand times that the banking industry in the United States and globally is much better than it was in 2007. And I ve said I have to agree that it s better, but better isn t adequate, nor is better strong; better s just better. And when you think of the benchmark of 2007, when the tangible capital of these institutions was and that is their loss real loss-absorbing capacity was around 3%, and today if you count account for it more wholly that is, you count not just their book assets, but their derivatives, off-balance-sheet book, and you use an international financial accounting standard and use the leverage ratio there it s a little more than 5%.

8 So up from 3% to about That s better, but the question is: Is that adequate? And you know, there are many estimates of what the losses were in the 2008/9 period, but certainly they were judged to be more than 5% of assets. So that s, I think, important to remember. Now, and today we have, I think, a fairly fragile the is better than most, if not all other countries in terms of its economic circumstances, but they are fragile. And we are encountering, for example, issues with energy, issues with commodities broadly, issues with leveraged lending. And there s nothing wrong with that; it s part of the risk-taking. And any one of those I think we can handle fine.

9 But if you were to have a surge among those, I think the market would be questioning in terms of their confidence in the institutions, which is it s all about confidence. And I keep reminding people, it isn t that you have 5% to zero. It s that you have 5% and you drop, and then people say, well, how much further are they going to drop? So if you have 10% tangible capital, which is what the industry had before the safety net became so dominant, you can drop 3 or 4% and still have a fair amount of capital left that you can, in fact, build back, maintain your loan book and so forth. So those are the things I think about when I think of, long term, what s going to give us the best economic outcomes.

10 And not just are we better than we were, but are we adequate and strong. And there we have a ways yet to go. MR. SCHLESINGER: You cited what you consider to be some potential weaknesses, or alluded to those, in the system. If you had to look now and say where you fear that the next crisis will come from, what are the two or three things that you would cite as the biggest risks? MR. HOENIG: Well, it s not I can t exactly I mean, I wouldn t even try to and tell you where the next crisis is coming from because I would take care of it, if I could. The point of it is that, if it comes, how well prepared are we for it? Now, remember, we have an economic system that is pretty much set around an equilibrium of zero interest rates.