WEBVTT - FDIC's Hoenig: A Myth That Capital Undermines Growth (Audio) 0:00:02.120 --> 0:00:05.480 Global business news twenty four hours a day. If Bloomberg 0:00:05.559 --> 0:00:08.640 dot Com the radio plus Globo Lab and on your radio. 0:00:08.920 --> 0:00:13.039 This is a Bloomberg Business flag from Bloomberg World Handquarters. 0:00:13.039 --> 0:00:16.480 I'm Charlie Palla, Dallas FED Chief Robert Kaplan, just wrapping 0:00:16.520 --> 0:00:19.400 up a live interview on Bloomberg Radio from Jackson holl 0:00:19.520 --> 0:00:22.040 touching on a number of topics, including the case for 0:00:22.239 --> 0:00:25.520 removing accommodation. I've been one of the FED presidents has 0:00:25.560 --> 0:00:28.520 been reluctant to speculate on individual meetings because I don't 0:00:28.520 --> 0:00:32.000 think it's productive. But I do think the case for 0:00:32.080 --> 0:00:36.680 removing accommodation is strengthening. Stocks are trading lawer. The SMP 0:00:36.840 --> 0:00:39.960 five hundred index down three to seventy two, a drop 0:00:40.000 --> 0:00:42.920 there of two tenths of one percent. Down Industrials down 0:00:42.960 --> 0:00:45.640 thirty three, a decline also of two tenths of one percent. 0:00:45.960 --> 0:00:49.040 NASA stackdown six, a drop of one tenth of one percent. 0:00:49.360 --> 0:00:51.960 The tenure down four thirty seconds had yield one point 0:00:52.000 --> 0:00:55.840 five seven percent. Gold down three seventy to thirty two, 0:00:55.880 --> 0:00:58.360 a drop of three tenths of one percent. Crude oil 0:00:58.400 --> 0:01:03.040 West Texas Intermediate up one point six Right now on 0:01:03.120 --> 0:01:07.120 West Texas Enemedia Crude. I'm Charlie Pellett. That's a Bloomberg 0:01:07.160 --> 0:01:11.920 Business Flash. This is taking Stock with Kathleen Hayes and 0:01:12.000 --> 0:01:15.400 Pim Fox line from the Jackson Hole Economic Symposium on 0:01:15.560 --> 0:01:19.720 Bloomberg Radio. This is taking Stock. I'm Pim Fox at 0:01:19.720 --> 0:01:22.800 Bloomberg World headquarters in New York and my colleague and 0:01:22.920 --> 0:01:26.679 co host Kathleen Hayes on site in Jackson Hole, Wyoming. 0:01:27.080 --> 0:01:30.640 Joining us now is Thomas Hanneck. He is Vice chairman 0:01:30.640 --> 0:01:34.480 of the Federal Deposit Insurance Corporation. He was formerly the 0:01:34.520 --> 0:01:38.240 eighth Chief Executive of the tenth District Federal Reserve Bank 0:01:38.360 --> 0:01:41.320 in Kansas City, and he served as a voting member 0:01:41.360 --> 0:01:44.840 of the Federal Open Market Committee. And he joins us now. 0:01:45.240 --> 0:01:48.160 Mr Hannick, what if you could comment on the banking 0:01:48.280 --> 0:01:53.080 situation as it relates to capital reserves and whether there 0:01:53.160 --> 0:01:56.960 is any contradiction between the desire to have banks lend 0:01:57.000 --> 0:01:59.960 money in a low interest rate environment on the one hand, 0:02:00.400 --> 0:02:04.440 but on the other hold them to higher capital standards 0:02:04.480 --> 0:02:07.960 which may indeed prevent them from lending the very money 0:02:08.120 --> 0:02:11.920 you hope to get into the system. Well, that's a 0:02:12.160 --> 0:02:14.400 very good question. And thank you for having me on 0:02:14.440 --> 0:02:17.720 your program. And let me begin by telling you that 0:02:17.840 --> 0:02:22.360 capital is not a reserve. Capital is lendable funds. And 0:02:22.560 --> 0:02:25.359 what we're trying to do is make sure that there 0:02:25.440 --> 0:02:30.520 is enough ownership capital, that is, enough ownership funds lending 0:02:30.560 --> 0:02:34.800 out there that makes the financial system safer. What you 0:02:34.919 --> 0:02:38.480 do and what the objective is when you allow your 0:02:38.520 --> 0:02:41.919 capital levels to fall, that is your ownership interest to fall, 0:02:42.600 --> 0:02:45.920 is you're allowing that ownership to leverage up their position, 0:02:46.840 --> 0:02:49.840 increasing the risk of the institution. And so should it 0:02:49.919 --> 0:02:54.120 run into difficulty, it has less margin for air, less 0:02:54.120 --> 0:03:00.120 margin for mistakes, and that can precipitate a downturn in 0:03:00.160 --> 0:03:04.000 the economy or in the precipitative crisis, as we've learned 0:03:04.639 --> 0:03:08.040 in the last crisis. So capital is very useful in 0:03:08.160 --> 0:03:14.239 terms of holding people responsible for the quality of the institution, 0:03:14.760 --> 0:03:17.560 and I think it has a very positive outcome. Let 0:03:17.560 --> 0:03:22.160 me also note for you that um those institutions, there's 0:03:22.280 --> 0:03:25.360 increasing evidence of recent study by the Followers Bank of 0:03:25.400 --> 0:03:28.000 New York as a matter of fact, that UH and 0:03:28.120 --> 0:03:30.840 also by the b I S that institutions that have 0:03:30.960 --> 0:03:35.000 higher capital levels are able to continue to lend during 0:03:35.000 --> 0:03:37.760 the downturn because they don't have the pressure to keep 0:03:37.800 --> 0:03:40.360 their capital ratios, that is the amount of capital they 0:03:40.440 --> 0:03:45.040 have two assets, uh to unusually to higher levels, are 0:03:45.160 --> 0:03:48.480 to the same levels as they increase their losses, and 0:03:48.520 --> 0:03:51.160 they can hold their customers and keep their customers funded 0:03:51.240 --> 0:03:54.080 during that period, and that helps mitigate the crisis. So 0:03:54.160 --> 0:03:57.520 capital is actually a very good thing, um, and I 0:03:58.800 --> 0:04:00.600 think to call it a reserve as if you put 0:04:00.600 --> 0:04:04.320 it aside or something is a mistake. Is lendable funds 0:04:04.720 --> 0:04:07.720 very productive, just like any other form of lendable funds 0:04:07.920 --> 0:04:10.080 and we need to keep that in mind well, of course, 0:04:10.200 --> 0:04:12.920 and of course PIM prefaces with the idea I think 0:04:12.920 --> 0:04:16.320 remplicitly that this makes it makes it harder for banks 0:04:16.360 --> 0:04:19.760 to lend and it is a drag on growth. Uh. 0:04:19.960 --> 0:04:22.080 Do you disagree with that? Is it, more broadly just 0:04:22.160 --> 0:04:25.480 too much regulation from Dodd? Frank, I absolutely disagree with that. 0:04:26.000 --> 0:04:30.400 Capital is proven to be Let me, let me just 0:04:30.440 --> 0:04:34.560 give you an example of where you were wrong under 0:04:34.920 --> 0:04:38.039 under a highly leveraged situation where you use risk based 0:04:38.040 --> 0:04:40.800 capital and you say, all right, these are low risk 0:04:40.920 --> 0:04:43.760 sovereign depth rest loans and so forth, so you lend 0:04:43.760 --> 0:04:46.680 to those people because there's no capital requirement there and 0:04:46.800 --> 0:04:51.000 loans who you have to hold more capital against you say, uh, 0:04:51.080 --> 0:04:54.960 they go unfunded, although they may be the better return uh, 0:04:55.040 --> 0:04:59.239 and therefore facilitate growth. And like I said, we've learned 0:04:59.279 --> 0:05:01.920 over and over again and that institutions that are well 0:05:02.000 --> 0:05:06.840 capitalized usually compete better. They can take on risk more 0:05:07.360 --> 0:05:10.080 aggressively because they have more capital, they can afford to 0:05:10.120 --> 0:05:12.800 make the mistake, and therefore it turns out to be 0:05:13.000 --> 0:05:16.039 much more supportive. And in fact, the b I S 0:05:16.160 --> 0:05:19.680 and its studies show that with higher capital levels we 0:05:19.720 --> 0:05:23.919 saw increases in lending, not decreases. So this, this myth 0:05:24.440 --> 0:05:28.080 that requiring capital is a bad thing is hurting the 0:05:28.120 --> 0:05:30.920 economy in the long run. It makes it less stable, 0:05:31.360 --> 0:05:35.240 more susceptible to contagion because when you have more capital, 0:05:35.360 --> 0:05:37.479 if one bank fails, it doesn't have to spill over 0:05:37.560 --> 0:05:40.920 to the next. Uh. Those are all things that capital 0:05:41.080 --> 0:05:44.400 serves purpose for. And I think it's, like I say, 0:05:44.440 --> 0:05:50.760 a myth to say that capital undermines growth in the economy. Um, 0:05:50.800 --> 0:05:53.279 now that doesn't mean you can't have borrowing, you shouldn't 0:05:53.279 --> 0:05:56.280 have leverage. That's very much a part of any economic 0:05:56.360 --> 0:06:01.080 situation or any economic growth, uh concept. At the same time, 0:06:01.360 --> 0:06:04.279 too little capital is destabilizing, and that's what you have 0:06:04.320 --> 0:06:10.560 to keep in mind. Mr har No no no no. 0:06:11.160 --> 0:06:13.480 Are just gonna say if you could comment on what 0:06:13.560 --> 0:06:16.599 you see as some of the fundamental issues facing the 0:06:16.680 --> 0:06:23.479 international banking system, particularly banks in Europe. Well, Europe has 0:06:24.279 --> 0:06:26.719 a couple of things going on. They first of all, 0:06:27.200 --> 0:06:31.080 tend to have less tangible capital than US banks, not 0:06:31.120 --> 0:06:33.720 a whole lot less, but less capital. And they have 0:06:33.839 --> 0:06:36.600 more as i'm as I read the i m F 0:06:36.880 --> 0:06:41.080 type reports, they have more legacy problem assets that they 0:06:41.120 --> 0:06:44.039 have to continue to deal with. And so that that's 0:06:44.360 --> 0:06:47.600 you know, that's a bad combination. That's capital more legacy 0:06:47.760 --> 0:06:52.039 problem assets, and you that that constricts your ability to 0:06:52.160 --> 0:06:53.839 lend and to grow. And I think we're seeing some 0:06:53.920 --> 0:06:57.599 of that effect Europe at this point. I think should 0:06:57.600 --> 0:07:02.039 they continue to weaken their capital in the name of growth, 0:07:02.080 --> 0:07:05.200 I think they'll actually have a perverse effect of actually 0:07:05.240 --> 0:07:07.400 waking their growth in the long run. But those are 0:07:07.520 --> 0:07:11.280 decisions they have. I think the United States has gained 0:07:11.280 --> 0:07:14.040 market share I'm told is that read the Financial Times 0:07:14.040 --> 0:07:17.240 because we as a as an industry in this part 0:07:17.240 --> 0:07:20.280 of the world are competing from a stronger position, that is, 0:07:20.320 --> 0:07:23.080 more capital, and I think that served this well and 0:07:23.120 --> 0:07:27.240 I think they should perhaps um look at that and 0:07:27.320 --> 0:07:30.920 see how that might infect improve their situation with more 0:07:30.960 --> 0:07:36.240 capital and working through their legacy problem assets tom uh 0:07:36.480 --> 0:07:40.120 Italian banks, non performing loans, many dark clouds homing hanging 0:07:40.120 --> 0:07:42.480 over their banks. I can understand how to maybe certainly 0:07:42.480 --> 0:07:46.000 an issue for Italy it's financial system and economy broadly 0:07:46.120 --> 0:07:49.440 within the OW area, and for the ECB on its 0:07:49.640 --> 0:07:52.840 problem or worry list. What about for the United States? Though? 0:07:53.000 --> 0:07:56.480 Is there any kind of financial risk from Europe? Europe's 0:07:56.560 --> 0:07:59.520 banking problems which are getting more and more attention, and 0:07:59.640 --> 0:08:03.880 our financial system in our markets, well, I think there's 0:08:03.960 --> 0:08:08.000 always the issue of contagion across continents because they're inner 0:08:08.560 --> 0:08:12.200 inter linked, not only with trade but with financial capital 0:08:12.240 --> 0:08:14.160 flows and so forth, so we have to be mindful 0:08:14.200 --> 0:08:18.000 of that. I think the US banks are pretty well 0:08:18.040 --> 0:08:23.480 positioned to uh handle some of that more successfully than 0:08:23.560 --> 0:08:26.160 say other countries, because we do have a little not 0:08:26.200 --> 0:08:29.600 a little, We do have a stronger capital position. I 0:08:29.640 --> 0:08:33.440 have argued and continue to argue our capital needs to 0:08:33.440 --> 0:08:36.960 be stronger. Yet that that would only help us in 0:08:37.000 --> 0:08:40.640 the long run. UM, But we are better positioned than 0:08:41.040 --> 0:08:44.400 other countries to withstand. We have less exposure to it 0:08:44.480 --> 0:08:47.000 number one, we have stronger capital number two, and I 0:08:47.040 --> 0:08:50.800 think those are big advantages over the long run. Mr Hannag, 0:08:50.840 --> 0:08:52.640 I want to just pick up on this idea of 0:08:52.760 --> 0:08:57.360 perhaps a relative world. UM. We've had many guests on 0:08:57.400 --> 0:09:01.439 the program who say that the bond market is currently distorted, 0:09:02.000 --> 0:09:06.679 that because of the relative high yield of US treasuries, 0:09:07.160 --> 0:09:10.000 money is flowing into treasuries for all the wrong reasons. 0:09:10.480 --> 0:09:13.680 What are your thoughts about distortion and bond interest rates 0:09:13.760 --> 0:09:18.800 and why bond prices have been going higher and higher. Well, 0:09:18.800 --> 0:09:22.120 there's a many, many elements of distortions. One of the 0:09:22.120 --> 0:09:25.480 elements of distortions is unusually low interest rates for eight 0:09:25.559 --> 0:09:29.839 years year interest rates are not normal under any definition 0:09:30.040 --> 0:09:34.880 of normal. This causes a reallocation of capital, movement of capital. 0:09:35.400 --> 0:09:39.880 And then you then, I use the often comparison of 0:09:40.160 --> 0:09:42.880 if you're grading on a curve the dollar and the 0:09:42.960 --> 0:09:46.240 US financial system is relatively stronger. Where do you put 0:09:46.240 --> 0:09:48.440 your money when you're uncertain? You put it where you 0:09:48.559 --> 0:09:51.240 have the greatest confidence, and that's in the us still. 0:09:51.480 --> 0:09:54.120 So those are the things that are affecting us. I 0:09:54.160 --> 0:09:56.560 want to ask you just one final question, Tom about 0:09:57.480 --> 0:10:00.080 bank regulations. This is an election year. There's all in 0:10:00.160 --> 0:10:02.599 the talk, and there's been talking last years more regulation, 0:10:02.800 --> 0:10:05.480 you know, put more regulation on, no, no, no, pull 0:10:05.559 --> 0:10:07.760 back last eagle. You're the vice chair of the f 0:10:07.880 --> 0:10:09.400 d i C. What do you think about what is 0:10:09.440 --> 0:10:12.280 needed or not needed? Now? Well, I think that's a 0:10:12.400 --> 0:10:16.080 very good question. I think um number one, that the 0:10:16.160 --> 0:10:19.640 largest institutions are incredibly large. They are too big to fail. 0:10:20.160 --> 0:10:22.959 We're not going to solve that time that anytime soon. 0:10:23.760 --> 0:10:25.960 And I think with that environment, you're going to have 0:10:26.000 --> 0:10:28.760 more regulation. Do we need more regular, more regulation to 0:10:28.840 --> 0:10:32.400 what we already have? The answers, No, we have tons 0:10:32.400 --> 0:10:35.120 of regulation. One of the things that I'm proposing is 0:10:35.640 --> 0:10:38.960 for what I refer to as simpler banks, more traditional 0:10:38.960 --> 0:10:43.320 banks where you're lending basically and taking deposits and not 0:10:43.440 --> 0:10:45.880 in the investment banking broken bank, that you really do 0:10:46.000 --> 0:10:50.760 get some substantial regulatory relief in place around capital, around lending, 0:10:50.920 --> 0:10:54.560 qualified mortgages, and so forth. And we do need to 0:10:54.600 --> 0:10:56.960 think about how we take some of this burden off 0:10:57.240 --> 0:11:00.319 the regional and smaller banks UH as soon as we can. 0:11:00.720 --> 0:11:02.520 Tom Hanig, thank you so very much. We're gonna have 0:11:02.520 --> 0:11:06.200 to come back and continue this conversation. Tom Hanig is 0:11:06.559 --> 0:11:09.480 the former president of the Federalist of Bank of Kansas City. 0:11:09.480 --> 0:11:12.240 He is the vice chair of the Federal Deposit Insurance Corporation. 0:11:12.360 --> 0:11:13.199 This is Bloomberg.