Hoenig Says Few Big U.S. Banks to Need More Bailouts

Government stress tests of U.S. banks’ ability to withstand a deeper recession are likely indicate that most don’t need more taxpayer money, Federal Reserve Bank of Kansas City President Thomas Hoenig said.

“I would point out, first, that although the United States has several thousand banks, only 19 have more than $100 billion of assets, and that after supervisory authorities evaluate their condition, it is likely that few would require further government intervention,” Hoenig said in the text of a speech in Tulsa, Oklahoma.

The remarks came as stocks rallied worldwide today as better-than-estimated earnings at Wells Fargo & Co. boosted confidence in the financial system and speculation that American banks will pass stress tests. Federal Reserve Bank of Minneapolis President Gary Stern said that while “appreciable strains” remain in credit markets, the resumption of U.S. economic growth “should not be too far off.”

President Barack Obama will get a progress report on stress tests at the 19 biggest U.S. banks when he meets tomorrow with his economic team. The exams, to conclude by the end of April, are designed to show how much extra capital banks may need to survive a deeper economic downturn.

Hoenig didn’t discuss the current U.S. economic outlook or interest-rate policy in his speech.

Speaking in Sioux Falls, South Dakota, Stern said, “while it is still far too early to fully tally results, there has been progress and I anticipate more to come.”

Failing Banks

In his speech, Hoenig repeated his view that the government shouldn’t prop up failing financial institutions. Instead, officials should take over institutions temporarily and wind them down, such as the takeover of Continental Illinois National Bank & Trust Co. in 1984.

“There has been much talk lately about a new resolution process for systemically important firms that Congress could enact, and I would encourage this be implemented as quickly as possible, but we do not have to wait for new authority,” Hoenig told the Tulsa Metro Chamber of Commerce. “We can act immediately, using essentially the same steps we used for Continental.”

Treasury Secretary Timothy Geithner and Fed Chairman Ben S. Bernanke last month called for new powers to take over and wind down failing financial companies after the government’s rescue of American International Group Inc. Bernanke and Geithner also called for stronger regulation to constrain the risks taken by firms that could endanger the financial system.

Conservatorship

“An extremely large firm that has failed would have to be temporarily operated as a conservatorship or a bridge organization and then reprivatized as quickly as is economically feasible,” Hoenig said. “We cannot simply add more capital without a change in the firm’s ownership and management and expect different outcomes.”

While the Federal Deposit Insurance Corp. has the power to take over failing deposit-taking firms and wind down their assets, no such authority exists for financial firms that aren’t classified as banks, such as AIG or a hedge fund with extensive links throughout the banking system.

Hoenig said calling a firm “too big to fail” is a “misstatement” because a bank deemed insolvent “has failed.”

“I believe that failure is an option,” he said.