1 00:00:02,120 --> 00:00:05,480 Speaker 1: Global business news twenty four hours a day. If Bloomberg 2 00:00:05,559 --> 00:00:08,640 Speaker 1: dot Com the radio plus Globo Lab and on your radio. 3 00:00:08,920 --> 00:00:13,039 Speaker 1: This is a Bloomberg Business flag from Bloomberg World Handquarters. 4 00:00:13,039 --> 00:00:16,480 Speaker 1: I'm Charlie Palla, Dallas FED Chief Robert Kaplan, just wrapping 5 00:00:16,520 --> 00:00:19,400 Speaker 1: up a live interview on Bloomberg Radio from Jackson holl 6 00:00:19,520 --> 00:00:22,040 Speaker 1: touching on a number of topics, including the case for 7 00:00:22,239 --> 00:00:25,520 Speaker 1: removing accommodation. I've been one of the FED presidents has 8 00:00:25,560 --> 00:00:28,520 Speaker 1: been reluctant to speculate on individual meetings because I don't 9 00:00:28,520 --> 00:00:32,000 Speaker 1: think it's productive. But I do think the case for 10 00:00:32,080 --> 00:00:36,680 Speaker 1: removing accommodation is strengthening. Stocks are trading lawer. The SMP 11 00:00:36,840 --> 00:00:39,960 Speaker 1: five hundred index down three to seventy two, a drop 12 00:00:40,000 --> 00:00:42,920 Speaker 1: there of two tenths of one percent. Down Industrials down 13 00:00:42,960 --> 00:00:45,640 Speaker 1: thirty three, a decline also of two tenths of one percent. 14 00:00:45,960 --> 00:00:49,040 Speaker 1: NASA stackdown six, a drop of one tenth of one percent. 15 00:00:49,360 --> 00:00:51,960 Speaker 1: The tenure down four thirty seconds had yield one point 16 00:00:52,000 --> 00:00:55,840 Speaker 1: five seven percent. Gold down three seventy to thirty two, 17 00:00:55,880 --> 00:00:58,360 Speaker 1: a drop of three tenths of one percent. Crude oil 18 00:00:58,400 --> 00:01:03,040 Speaker 1: West Texas Intermediate up one point six Right now on 19 00:01:03,120 --> 00:01:07,120 Speaker 1: West Texas Enemedia Crude. I'm Charlie Pellett. That's a Bloomberg 20 00:01:07,160 --> 00:01:11,920 Speaker 1: Business Flash. This is taking Stock with Kathleen Hayes and 21 00:01:12,000 --> 00:01:15,400 Speaker 1: Pim Fox line from the Jackson Hole Economic Symposium on 22 00:01:15,560 --> 00:01:19,720 Speaker 1: Bloomberg Radio. This is taking Stock. I'm Pim Fox at 23 00:01:19,720 --> 00:01:22,800 Speaker 1: Bloomberg World headquarters in New York and my colleague and 24 00:01:22,920 --> 00:01:26,679 Speaker 1: co host Kathleen Hayes on site in Jackson Hole, Wyoming. 25 00:01:27,080 --> 00:01:30,640 Speaker 1: Joining us now is Thomas Hanneck. He is Vice chairman 26 00:01:30,640 --> 00:01:34,480 Speaker 1: of the Federal Deposit Insurance Corporation. He was formerly the 27 00:01:34,520 --> 00:01:38,240 Speaker 1: eighth Chief Executive of the tenth District Federal Reserve Bank 28 00:01:38,360 --> 00:01:41,320 Speaker 1: in Kansas City, and he served as a voting member 29 00:01:41,360 --> 00:01:44,840 Speaker 1: of the Federal Open Market Committee. And he joins us now. 30 00:01:45,240 --> 00:01:48,160 Speaker 1: Mr Hannick, what if you could comment on the banking 31 00:01:48,280 --> 00:01:53,080 Speaker 1: situation as it relates to capital reserves and whether there 32 00:01:53,160 --> 00:01:56,960 Speaker 1: is any contradiction between the desire to have banks lend 33 00:01:57,000 --> 00:01:59,960 Speaker 1: money in a low interest rate environment on the one hand, 34 00:02:00,400 --> 00:02:04,440 Speaker 1: but on the other hold them to higher capital standards 35 00:02:04,480 --> 00:02:07,960 Speaker 1: which may indeed prevent them from lending the very money 36 00:02:08,120 --> 00:02:11,920 Speaker 1: you hope to get into the system. Well, that's a 37 00:02:12,160 --> 00:02:14,400 Speaker 1: very good question. And thank you for having me on 38 00:02:14,440 --> 00:02:17,720 Speaker 1: your program. And let me begin by telling you that 39 00:02:17,840 --> 00:02:22,360 Speaker 1: capital is not a reserve. Capital is lendable funds. And 40 00:02:22,560 --> 00:02:25,359 Speaker 1: what we're trying to do is make sure that there 41 00:02:25,440 --> 00:02:30,520 Speaker 1: is enough ownership capital, that is, enough ownership funds lending 42 00:02:30,560 --> 00:02:34,800 Speaker 1: out there that makes the financial system safer. What you 43 00:02:34,919 --> 00:02:38,480 Speaker 1: do and what the objective is when you allow your 44 00:02:38,520 --> 00:02:41,919 Speaker 1: capital levels to fall, that is your ownership interest to fall, 45 00:02:42,600 --> 00:02:45,920 Speaker 1: is you're allowing that ownership to leverage up their position, 46 00:02:46,840 --> 00:02:49,840 Speaker 1: increasing the risk of the institution. And so should it 47 00:02:49,919 --> 00:02:54,120 Speaker 1: run into difficulty, it has less margin for air, less 48 00:02:54,120 --> 00:03:00,120 Speaker 1: margin for mistakes, and that can precipitate a downturn in 49 00:03:00,160 --> 00:03:04,000 Speaker 1: the economy or in the precipitative crisis, as we've learned 50 00:03:04,639 --> 00:03:08,040 Speaker 1: in the last crisis. So capital is very useful in 51 00:03:08,160 --> 00:03:14,239 Speaker 1: terms of holding people responsible for the quality of the institution, 52 00:03:14,760 --> 00:03:17,560 Speaker 1: and I think it has a very positive outcome. Let 53 00:03:17,560 --> 00:03:22,160 Speaker 1: me also note for you that um those institutions, there's 54 00:03:22,280 --> 00:03:25,360 Speaker 1: increasing evidence of recent study by the Followers Bank of 55 00:03:25,400 --> 00:03:28,000 Speaker 1: New York as a matter of fact, that UH and 56 00:03:28,120 --> 00:03:30,840 Speaker 1: also by the b I S that institutions that have 57 00:03:30,960 --> 00:03:35,000 Speaker 1: higher capital levels are able to continue to lend during 58 00:03:35,000 --> 00:03:37,760 Speaker 1: the downturn because they don't have the pressure to keep 59 00:03:37,800 --> 00:03:40,360 Speaker 1: their capital ratios, that is the amount of capital they 60 00:03:40,440 --> 00:03:45,040 Speaker 1: have two assets, uh to unusually to higher levels, are 61 00:03:45,160 --> 00:03:48,480 Speaker 1: to the same levels as they increase their losses, and 62 00:03:48,520 --> 00:03:51,160 Speaker 1: they can hold their customers and keep their customers funded 63 00:03:51,240 --> 00:03:54,080 Speaker 1: during that period, and that helps mitigate the crisis. So 64 00:03:54,160 --> 00:03:57,520 Speaker 1: capital is actually a very good thing, um, and I 65 00:03:58,800 --> 00:04:00,600 Speaker 1: think to call it a reserve as if you put 66 00:04:00,600 --> 00:04:04,320 Speaker 1: it aside or something is a mistake. Is lendable funds 67 00:04:04,720 --> 00:04:07,720 Speaker 1: very productive, just like any other form of lendable funds 68 00:04:07,920 --> 00:04:10,080 Speaker 1: and we need to keep that in mind well, of course, 69 00:04:10,200 --> 00:04:12,920 Speaker 1: and of course PIM prefaces with the idea I think 70 00:04:12,920 --> 00:04:16,320 Speaker 1: remplicitly that this makes it makes it harder for banks 71 00:04:16,360 --> 00:04:19,760 Speaker 1: to lend and it is a drag on growth. Uh. 72 00:04:19,960 --> 00:04:22,080 Speaker 1: Do you disagree with that? Is it, more broadly just 73 00:04:22,160 --> 00:04:25,480 Speaker 1: too much regulation from Dodd? Frank, I absolutely disagree with that. 74 00:04:26,000 --> 00:04:30,400 Speaker 1: Capital is proven to be Let me, let me just 75 00:04:30,440 --> 00:04:34,560 Speaker 1: give you an example of where you were wrong under 76 00:04:34,920 --> 00:04:38,039 Speaker 1: under a highly leveraged situation where you use risk based 77 00:04:38,040 --> 00:04:40,800 Speaker 1: capital and you say, all right, these are low risk 78 00:04:40,920 --> 00:04:43,760 Speaker 1: sovereign depth rest loans and so forth, so you lend 79 00:04:43,760 --> 00:04:46,680 Speaker 1: to those people because there's no capital requirement there and 80 00:04:46,800 --> 00:04:51,000 Speaker 1: loans who you have to hold more capital against you say, uh, 81 00:04:51,080 --> 00:04:54,960 Speaker 1: they go unfunded, although they may be the better return uh, 82 00:04:55,040 --> 00:04:59,239 Speaker 1: and therefore facilitate growth. And like I said, we've learned 83 00:04:59,279 --> 00:05:01,920 Speaker 1: over and over again and that institutions that are well 84 00:05:02,000 --> 00:05:06,840 Speaker 1: capitalized usually compete better. They can take on risk more 85 00:05:07,360 --> 00:05:10,080 Speaker 1: aggressively because they have more capital, they can afford to 86 00:05:10,120 --> 00:05:12,800 Speaker 1: make the mistake, and therefore it turns out to be 87 00:05:13,000 --> 00:05:16,039 Speaker 1: much more supportive. And in fact, the b I S 88 00:05:16,160 --> 00:05:19,680 Speaker 1: and its studies show that with higher capital levels we 89 00:05:19,720 --> 00:05:23,919 Speaker 1: saw increases in lending, not decreases. So this, this myth 90 00:05:24,440 --> 00:05:28,080 Speaker 1: that requiring capital is a bad thing is hurting the 91 00:05:28,120 --> 00:05:30,920 Speaker 1: economy in the long run. It makes it less stable, 92 00:05:31,360 --> 00:05:35,240 Speaker 1: more susceptible to contagion because when you have more capital, 93 00:05:35,360 --> 00:05:37,479 Speaker 1: if one bank fails, it doesn't have to spill over 94 00:05:37,560 --> 00:05:40,920 Speaker 1: to the next. Uh. Those are all things that capital 95 00:05:41,080 --> 00:05:44,400 Speaker 1: serves purpose for. And I think it's, like I say, 96 00:05:44,440 --> 00:05:50,760 Speaker 1: a myth to say that capital undermines growth in the economy. Um, 97 00:05:50,800 --> 00:05:53,279 Speaker 1: now that doesn't mean you can't have borrowing, you shouldn't 98 00:05:53,279 --> 00:05:56,280 Speaker 1: have leverage. That's very much a part of any economic 99 00:05:56,360 --> 00:06:01,080 Speaker 1: situation or any economic growth, uh concept. At the same time, 100 00:06:01,360 --> 00:06:04,279 Speaker 1: too little capital is destabilizing, and that's what you have 101 00:06:04,320 --> 00:06:10,560 Speaker 1: to keep in mind. Mr har No no no no. 102 00:06:11,160 --> 00:06:13,480 Speaker 1: Are just gonna say if you could comment on what 103 00:06:13,560 --> 00:06:16,599 Speaker 1: you see as some of the fundamental issues facing the 104 00:06:16,680 --> 00:06:23,479 Speaker 1: international banking system, particularly banks in Europe. Well, Europe has 105 00:06:24,279 --> 00:06:26,719 Speaker 1: a couple of things going on. They first of all, 106 00:06:27,200 --> 00:06:31,080 Speaker 1: tend to have less tangible capital than US banks, not 107 00:06:31,120 --> 00:06:33,720 Speaker 1: a whole lot less, but less capital. And they have 108 00:06:33,839 --> 00:06:36,600 Speaker 1: more as i'm as I read the i m F 109 00:06:36,880 --> 00:06:41,080 Speaker 1: type reports, they have more legacy problem assets that they 110 00:06:41,120 --> 00:06:44,039 Speaker 1: have to continue to deal with. And so that that's 111 00:06:44,360 --> 00:06:47,600 Speaker 1: you know, that's a bad combination. That's capital more legacy 112 00:06:47,760 --> 00:06:52,039 Speaker 1: problem assets, and you that that constricts your ability to 113 00:06:52,160 --> 00:06:53,839 Speaker 1: lend and to grow. And I think we're seeing some 114 00:06:53,920 --> 00:06:57,599 Speaker 1: of that effect Europe at this point. I think should 115 00:06:57,600 --> 00:07:02,039 Speaker 1: they continue to weaken their capital in the name of growth, 116 00:07:02,080 --> 00:07:05,200 Speaker 1: I think they'll actually have a perverse effect of actually 117 00:07:05,240 --> 00:07:07,400 Speaker 1: waking their growth in the long run. But those are 118 00:07:07,520 --> 00:07:11,280 Speaker 1: decisions they have. I think the United States has gained 119 00:07:11,280 --> 00:07:14,040 Speaker 1: market share I'm told is that read the Financial Times 120 00:07:14,040 --> 00:07:17,240 Speaker 1: because we as a as an industry in this part 121 00:07:17,240 --> 00:07:20,280 Speaker 1: of the world are competing from a stronger position, that is, 122 00:07:20,320 --> 00:07:23,080 Speaker 1: more capital, and I think that served this well and 123 00:07:23,120 --> 00:07:27,240 Speaker 1: I think they should perhaps um look at that and 124 00:07:27,320 --> 00:07:30,920 Speaker 1: see how that might infect improve their situation with more 125 00:07:30,960 --> 00:07:36,240 Speaker 1: capital and working through their legacy problem assets tom uh 126 00:07:36,480 --> 00:07:40,120 Speaker 1: Italian banks, non performing loans, many dark clouds homing hanging 127 00:07:40,120 --> 00:07:42,480 Speaker 1: over their banks. I can understand how to maybe certainly 128 00:07:42,480 --> 00:07:46,000 Speaker 1: an issue for Italy it's financial system and economy broadly 129 00:07:46,120 --> 00:07:49,440 Speaker 1: within the OW area, and for the ECB on its 130 00:07:49,640 --> 00:07:52,840 Speaker 1: problem or worry list. What about for the United States? Though? 131 00:07:53,000 --> 00:07:56,480 Speaker 1: Is there any kind of financial risk from Europe? Europe's 132 00:07:56,560 --> 00:07:59,520 Speaker 1: banking problems which are getting more and more attention, and 133 00:07:59,640 --> 00:08:03,880 Speaker 1: our financial system in our markets, well, I think there's 134 00:08:03,960 --> 00:08:08,000 Speaker 1: always the issue of contagion across continents because they're inner 135 00:08:08,560 --> 00:08:12,200 Speaker 1: inter linked, not only with trade but with financial capital 136 00:08:12,240 --> 00:08:14,160 Speaker 1: flows and so forth, so we have to be mindful 137 00:08:14,200 --> 00:08:18,000 Speaker 1: of that. I think the US banks are pretty well 138 00:08:18,040 --> 00:08:23,480 Speaker 1: positioned to uh handle some of that more successfully than 139 00:08:23,560 --> 00:08:26,160 Speaker 1: say other countries, because we do have a little not 140 00:08:26,200 --> 00:08:29,600 Speaker 1: a little, We do have a stronger capital position. I 141 00:08:29,640 --> 00:08:33,440 Speaker 1: have argued and continue to argue our capital needs to 142 00:08:33,440 --> 00:08:36,960 Speaker 1: be stronger. Yet that that would only help us in 143 00:08:37,000 --> 00:08:40,640 Speaker 1: the long run. UM, But we are better positioned than 144 00:08:41,040 --> 00:08:44,400 Speaker 1: other countries to withstand. We have less exposure to it 145 00:08:44,480 --> 00:08:47,000 Speaker 1: number one, we have stronger capital number two, and I 146 00:08:47,040 --> 00:08:50,800 Speaker 1: think those are big advantages over the long run. Mr Hannag, 147 00:08:50,840 --> 00:08:52,640 Speaker 1: I want to just pick up on this idea of 148 00:08:52,760 --> 00:08:57,360 Speaker 1: perhaps a relative world. UM. We've had many guests on 149 00:08:57,400 --> 00:09:01,439 Speaker 1: the program who say that the bond market is currently distorted, 150 00:09:02,000 --> 00:09:06,679 Speaker 1: that because of the relative high yield of US treasuries, 151 00:09:07,160 --> 00:09:10,000 Speaker 1: money is flowing into treasuries for all the wrong reasons. 152 00:09:10,480 --> 00:09:13,680 Speaker 1: What are your thoughts about distortion and bond interest rates 153 00:09:13,760 --> 00:09:18,800 Speaker 1: and why bond prices have been going higher and higher. Well, 154 00:09:18,800 --> 00:09:22,120 Speaker 1: there's a many, many elements of distortions. One of the 155 00:09:22,120 --> 00:09:25,480 Speaker 1: elements of distortions is unusually low interest rates for eight 156 00:09:25,559 --> 00:09:29,839 Speaker 1: years year interest rates are not normal under any definition 157 00:09:30,040 --> 00:09:34,880 Speaker 1: of normal. This causes a reallocation of capital, movement of capital. 158 00:09:35,400 --> 00:09:39,880 Speaker 1: And then you then, I use the often comparison of 159 00:09:40,160 --> 00:09:42,880 Speaker 1: if you're grading on a curve the dollar and the 160 00:09:42,960 --> 00:09:46,240 Speaker 1: US financial system is relatively stronger. Where do you put 161 00:09:46,240 --> 00:09:48,440 Speaker 1: your money when you're uncertain? You put it where you 162 00:09:48,559 --> 00:09:51,240 Speaker 1: have the greatest confidence, and that's in the us still. 163 00:09:51,480 --> 00:09:54,120 Speaker 1: So those are the things that are affecting us. I 164 00:09:54,160 --> 00:09:56,560 Speaker 1: want to ask you just one final question, Tom about 165 00:09:57,480 --> 00:10:00,080 Speaker 1: bank regulations. This is an election year. There's all in 166 00:10:00,160 --> 00:10:02,599 Speaker 1: the talk, and there's been talking last years more regulation, 167 00:10:02,800 --> 00:10:05,480 Speaker 1: you know, put more regulation on, no, no, no, pull 168 00:10:05,559 --> 00:10:07,760 Speaker 1: back last eagle. You're the vice chair of the f 169 00:10:07,880 --> 00:10:09,400 Speaker 1: d i C. What do you think about what is 170 00:10:09,440 --> 00:10:12,280 Speaker 1: needed or not needed? Now? Well, I think that's a 171 00:10:12,400 --> 00:10:16,080 Speaker 1: very good question. I think um number one, that the 172 00:10:16,160 --> 00:10:19,640 Speaker 1: largest institutions are incredibly large. They are too big to fail. 173 00:10:20,160 --> 00:10:22,959 Speaker 1: We're not going to solve that time that anytime soon. 174 00:10:23,760 --> 00:10:25,960 Speaker 1: And I think with that environment, you're going to have 175 00:10:26,000 --> 00:10:28,760 Speaker 1: more regulation. Do we need more regular, more regulation to 176 00:10:28,840 --> 00:10:32,400 Speaker 1: what we already have? The answers, No, we have tons 177 00:10:32,400 --> 00:10:35,120 Speaker 1: of regulation. One of the things that I'm proposing is 178 00:10:35,640 --> 00:10:38,960 Speaker 1: for what I refer to as simpler banks, more traditional 179 00:10:38,960 --> 00:10:43,320 Speaker 1: banks where you're lending basically and taking deposits and not 180 00:10:43,440 --> 00:10:45,880 Speaker 1: in the investment banking broken bank, that you really do 181 00:10:46,000 --> 00:10:50,760 Speaker 1: get some substantial regulatory relief in place around capital, around lending, 182 00:10:50,920 --> 00:10:54,560 Speaker 1: qualified mortgages, and so forth. And we do need to 183 00:10:54,600 --> 00:10:56,960 Speaker 1: think about how we take some of this burden off 184 00:10:57,240 --> 00:11:00,319 Speaker 1: the regional and smaller banks UH as soon as we can. 185 00:11:00,720 --> 00:11:02,520 Speaker 1: Tom Hanig, thank you so very much. We're gonna have 186 00:11:02,520 --> 00:11:06,200 Speaker 1: to come back and continue this conversation. Tom Hanig is 187 00:11:06,559 --> 00:11:09,480 Speaker 1: the former president of the Federalist of Bank of Kansas City. 188 00:11:09,480 --> 00:11:12,240 Speaker 1: He is the vice chair of the Federal Deposit Insurance Corporation. 189 00:11:12,360 --> 00:11:13,199 Speaker 1: This is Bloomberg.