Sign Kansas Banking RFP Later

Industry sign banking kansas rfp later

okay hi everyone and welcome to super it's good to see see see many of you here and I'm really looking forward to seeing many more of you join us in just 16 days for our economic summit today though we're in for a real treat we have a guest speaker from the frontlines of economic policymaking with us for today's associates meeting dr. Tom Koenig is the vice chairman of the FDIC the Federal Deposit Insurance Corporation which provides insurance to depositors in US banks along with multiple regulatory functions the FDIC provides insurance to I believe five thousand two hundred is at the five thousand seven hundred five thousand seven hundred different financial institutions so that makes for a very busy agenda and gives dr. Hoenig a very clear view of how things are going on in the banking industry now the FDIC was the product of the 1933 Banking Act eighty-five years ago and was meant to insure bank deposits and restore faith in the banks during the Great Depression nowadays the FDIC doesn't necessarily make a ton of headlines nor does its vice-chair try to though you will find from time to time him in the headlines with leading outlets like The Wall Street Journal FDIC's Hoenig keeps Wall Street on edge so consistent with this and we'll hear more about that today dr. Hoenig was in the news earlier this year when he sent a letter to the Senate Banking Committee warning about a few provisions in a bill aimed at easing banking rules he signaled some concern over language that would exempt smaller banks from the Volcker Rule that bans proprietary trading and would then encourage those banks potentially to take on more risk he told lawmakers that certain sections of the bill would quote remove important safeguards that could jeopardize the strides we have made towards stable long-term economic growth his concern for smart banking regulation is certainly nothing new in 2009 when he was the president of the Kansas City Federal Reserve he gave a harsh assess of the government's handling of the upheaval among financial institutions during the financial crisis he criticised authorities for being too quick to bail out struggling firms and not having a clear plan to address some of the underlying problems that led to their troubles he's actually been at the FDIC since 2012 six years when he was elected to serve as the agency's vice chairman and board member and prior to that he had been running the Kansas City Fed as its president for twenty years and served for much of that time on the Federal Open Market Committee Tom had been with the Federal Reserve for a total of 38 years 38 years with the Federal Reserve starting out as an economist and then as a senior offer in banking supervisions during the country's banking crisis in the 1980s in 1986 he led the Kansas City feds division of bank supervision and structure where he directed the oversight of more than a thousand banks and bank holding companies with assets up to 20 billion dollars and they made him president there in 1991 a long before he became involved in banking regulations and setting monetary policy dr. Hoenig received a doctorate in economics in his home state from Iowa State University and I'll just say that in next week in my econ 1 class I am covering financial regulations so if you see me furiously scribbling down notes during today's session you now know why so with that I'm so grateful and please join me in welcoming dr. Hoenig with us here to see / and we're delighted to it to welcome you well thank you mark thank you for inviting me here I told some of you that it was really a hard trip I left the ice storm in Kansas City to be here with you today and that was quite a sacrifice on my part but I am I am pleased to be here and I am going to talk about some of the issues around the safety net today but I want to I want to accomplish two or three things I want to acknowledge that right now there is a re-emergence of the discussion perhaps the debate around banking regulation and supervision and I'm going to share some of my perspective on that but I want to set the context and that is I am certainly in favor of some of the need for regulatory relief the banking industry is one of the most heavily regulated industries in the country it's also one of the most heavily subsidized industries and therein lies some of the conflict but I want to I want to set it up by acknowledging right now the economy then talk about the issues around regulatory relief and I want to distinguish between what I think is of I think of as Prudential Regulation supervision versus administrative I think there's more opportunity for some pretty substantial relief and the administrative side so that's kind of where I'm coming from let me set it up because I want to acknowledge that the US economy right now is in a almost like a boom in terms of the economic activity with the stock market rising incomes rising we're seeing our GDP this year is projected to be around 2.8 close to 3% which will be a very significant increase over the more recent years since the last crisis unemployment is around 4% and we have I think a very strong economy there industrial productions up every component of GDP consumption investment government spending looks like it will be up fiscal policy is very stimulative in terms of the tax cuts the drag is our external sector and that even is a sign of a strong economy because it's a growing deficit due to our consumption of other goods overseas so we have a very good economy and in that environment there is an increasing appetite for risk among our banks as well as other industries and I recognize that and around that appetite for risk is a very strong desire to remove some of the regulatory burden or requirements of the industry and I understand that as well so what I want to do is I want to say there when I think about it I look at regulation from the point of view of Prudential Regulation versus administrative and by Prudential I mean two basic elements one is capital the true owner capital that is the source of funding that comes from the investors that can be used lent out or loaned out and so forth and the fact that we need sufficient capital so that the ownership sector does some of the disciplining of the firm up front the second prudential element that i want to talk about is around the idea of how broadly you extend the safety net Deposit Insurance the liquidity backup that the Federal Reserve gives the guarantees that go with that from what was traditionally commercial bank into broker-dealer activities investment banking and so forth and why that I think is important in contrast to that is the administrative issues some things that I'll talk about living wills resolution plans things that are required under the law that I think are less productive but substitute for Prudential supervision so that's part of it in the first slide if I can get this right this is kind of the history of the what I'll call the subsidy or the support for the industry it is it shows that the amount of capital ownership capital the tangible capital that absorbs loss from the owners a systematic to decline and coincidentally that lines up pretty well with increases of the safety net the Federal Reserve formed in 1913 actually the control of the currency in 1863 64 been the forming of the of the Federal Reserve and then deposit insurance for retail depositors so as those safety net came forward and the market demanded less of these institutions the subsidy grew and banks were able to increase their debt as of funds versus their equity and I think that is a very substantial benefit to the industry it allowed them to lever and to at least temporarily boost their returns with the industry so as that declined and the subsidy grew the industry became more vulnerable accordingly if you look at them at the next graph which is the crisis year that when you look at the losses in 2008 plus the so-called equity that provided by the government known as tarp the losses were about equal to the - about 6% of assets but when you looked at that graph earlier the one that I just showed you you'll see that the tangible capital their ownership equity was closer to 3% so no wonder we had a lack of confidence losses were mounting faster than the equity and government had to step in so let's remember that as we go forward from here that leads us then to the other element and that was a consolidation of the industry which has continued all past the crisis but certainly to the crisis we had a long period of very stable conditions and the industry I think very successfully lobbied for allowing them to engage in more activities to use the commercial bank and let them get into other activities like Investment Banking broker-dealer activities and so forth in the bank and there that grew and so the the growth of the industry there was major acquisitions of some of the investment firms before and after the crisis it actually got even more so and we see that in the growth of the non-bank or the concentration of the industry overall I think that is important to realize so when we had then the crisis came the correction right and the the main parts of that were in the so-called dodd-frank act the important thing to remember there was two prudential standards that i think are very important one there was more emphasis on using ownership equity or capital to absorb the loss versus the low capital ratios and the government standing behind it in terms of the safety net and we saw that in improvements in capital which are showing a second the second was narrowing to some extent of the use of the safety net that is the Federal Reserve's liquidity facility and the federal and the FDIC's insurance facility to under write or be part of the support for these commercial banks that were engaged in number one some of the broker-dealer activities and some of the ownership of hedge funds that were allowed earlier in that decade so there was a correction called the Volcker rule the limited proprietary trading and and the use of insured funds to invest in an own or support hedge fund activities you saw the improvements then the capital ratios of these institutions have improved from as low as three and two percent the five and six and even eight percent in one instance so capital was strengthened and that I think is a very substantial improvement now as they limited the activities as capital improved the subsidies still remain it was less but it still remained and that you can see in this slide here so prior to the issuance of the safety or the growth of the safety net thanks for holding 10 to 12 percent tangible equity that investors sources of funds to assets and if we were to require that today just 10% it was more than that but if we would require that today 10% what this shows is that they would have to own that the top 10 banks would have to have about a tree in for a little more than a trillion for of capital they have about a trillion dollars of tangible capital that means 400 over 400 billion dollars is implied backstop that the taxpayer provides right because if we're gonna bail them out with tarp we're going to bail them out with tarp right so that's really part of what's going on there they're able to lever it they get a higher ROI festers are happy and the the safety net is behind it and that is part of the subsidy that continues that I think is important there are other is their footprint it's larger than ever now by this I mean the following it's not just the assets they have on their balance sheet okay it's the assets they have on their balance sheet the derivatives that are off balance sheet but on fair value add substantially to their balance sheet the the next is the amount of trust assets they hold so they have that influence and the final is the amount of safekeeping they do for others so if they post collateral they hold the collateral they can lend that collateral temporarily and that's all part of the of what they touch and it's substantial as you can see for the largest for its larger in terms of what they touch compared to the GDP which tells me that too-big-to-fail remains with us very much this case there is no Secretary of Treasury that I can think of and and and I think of myself as fairly you know I would like to see the market discipline come forward but if I were in that position and one of them was going down I'd say bail them out I don't want to be on my watch that we have that kind of a failure and that's really part of the continuing of the too-big-to-fail subsidy that's going forward so Prudential standards our capital and limiting extension of the safety net to other activities especially prop trading and high-risk activities let that be outside of the commercial bank now the argument back right now especially given that things are really doing well in the economy is that those kinds of capital requirements that you're asking for Tom of 10 percent or higher and those limiting those activities to more traditional act commercial banking activities is impeding growth but if you look at that let me tell you if you have marginal capital and this shows the trend of lending through the cycle the banks that have the least amount of capital were the ones that withdrew the lending was quickly and as was told in my region why should I save you I've got to I've got to worry about myself and the loans were pulled so you had that going on and that's true better capitalized banks were able to support through the cycle the same for smaller banks also then by limiting having the Volcker rule in that trading limited Delaney for for the ability to have loans for training activities under the Volcker Rule but since the crisis lending has continued to go up there's been no American impediment to trading activities and I think that's very important to note in both cases same thing with the the spreads all right so it's not that the pricing is so much that we're pricing them out of the market they're still very competitive able to provide that so that's really the point so now that's the last of the slides but that doesn't mean that there is an opportunity for true reg relief for example if you have the route the amount of capital the idea of resolution let's talk about that for a minute and the dodd-frank act of FDIC and the Fed we are require of all the largest banks resolution plan it's hundreds thousands of pages that I think is an exercise in paper pushing all right because you cannot solve the issue of cross-border issues with the largest institution through the resolution plan there there you will ring-fence the day the problems start so we can write this stuff down we can talk about triggers for that for a crisis and what are you going to do how long is your liquidity gonna last the fact of the matter is it's not it's it's an issue that will never ever it will evolve the way you plan it in the resolution we're generating tremendous fees for consultants but not much in terms of solutions the stress tests I love the stress tests I think banks should do them when we set up models and the whole idea of the industry is to find out what the model is so we can game it and and they and that's normal but it's it's expensive and it doesn't accomplish a lot so let's eliminate that simplify let's get get that out of the way we have other things that that they're using and one of them is a total loss absorbing capital it's using debt and the parent it's a very expensive exercise they have to put the debt in and assume to go down but the fact of the matter is if you have a crisis the supervisor has to make a hard choice do I let them go into default because the bank needs the capital or do I let them pay the dividends up to cover it so it doesn't go on default so that things remain stable I guarantee you that there'll be a bailout to make sure that doesn't have to be called so that's another opportunity liquidity rules if you have the right amount of capital that's a very strong source of liquidity it's a source of confidence and so we have very arcane liquidity rules that I assure you as we go through the cycle and the crisis will serve no useful purpose other than to cause a furtherance of the crisis itself so these are the sorts of things what I call the ad inistrative burden of developing lots of plans lots of paperwork but very little else that should be eliminated and focus on the Prudential standards yes let's argue about that it's 10 percent enough or not I think it is let's focus on that and let's limit the amount of the safety net and how far we extend it I think we'll all be all that are so my point is simple we are now in a time where the economy is strongest the arguments for deregulation will be hard to argue against because the crisis is forgotten by many and times are good and we want to use leverage to our own advantage but we ought to think about it let's focus on keeping the Prudential standards and let's finally get rid if we're going to get rid of something you've rid of the administrative stuff that costs a lot of money and produces very little and I think we'll have a better banking system last thing I will tell you is because we have insisted on stronger capital I think we are this most successful banking system in the world Europe doesn't compare to us I hate to tell you if you're from Europe we have a much stronger we're taking market share and that's from strength not from competing to the bottom but from strength so I'm going to stop there I know that some of you may disagree with me I can't imagine why but it could happen and I'm happy to take your questions or your comments thank you I'm happy to hear that we are doing better than Europe on this metric because they are sort of crushing us right now in the Olympics so the medal count it's it's not very close so anyway but but we've got them on banking regulation yep so you talked about how its own and can I ask a few questions about banking regulation and then perhaps a bit on monetary policy and then open it up for others here who have much more expertise in this space than I do but when you look out at the world right now you talked about the economy is very strong 4% unemployment S&P 500's up about 31% over the last 15 or so months it's been you know things have been going very well and in your sector the banking sector the return has been even higher for 70ish percentage pending on how exactly you define things so at a high level it sounds like to you things look good but I'm interested to hear your sense of vulnerability are we more vulnerable now than we were let's say 11 years ago 2007 February of 2007 and if so why or if and maybe it's maybe there's some things go one way some things go the other way but good question I think we're I mean we are we are stronger today than we were eleven years ago relative to the capital numbers that I showed you relative to the types of assets that we have on our books right now I think we're I think we're less vulnerable however I like to tell people given my years and supervision that right now we're making all our mistakes right because right now things are very good we have an appetite for risk we want that but that's probably where we're going we're sowing the seeds I don't know where they are whether it's in leverage lending collateralized loan obligations we don't know and as someone said you won't know until it breaks because if you fight the last war you're gonna get surprised by where the were the enemy outflanked you so I think we're we're better able to absorb shock than we were then but I don't take that for granted because if you had six percent losses in six percent capital your market is going to lose confidence so and other things may cause it but certainly that won't be a help right so one of the things that in the in the banking sector there's really good data but out by the Fed by FDIC and others so you can get a sense of how different players are growing over time my sense is that some of the biggest banks have gotten differentially have grown more rapidly than the sector as a whole so that one could argue the market is becoming somewhat more concentrated the bigger banks are becoming larger and when you sort of think about the sector and this too-big-to-fail kind of kind of issue what how there's this question an industrial organization of how many competitors is the right numbers who it's for and off its 8:15 and what-have-you so I'm curious how you think about this in the banking sector we've got hundreds and hundreds of banks look at top five are pretty dominant right so perhaps you can well I I mean we are not as concentrated as other countries but that's of course not the definition of whether you're concentrated too much or not and I think we've become rapidly more concentrated in this country in the last two decades we have you know the largest the largest ten banks at one point I'd like and don't hold me these numbers but something like 20 percent now it's over 50 percent and growing so we are becoming more concentrated our market structures change we used to have restrictions under state banking that's gone away so some of that's to be expected I do think that the thing that bothers me is when you then look at how much of the financial industry is touched and influenced by these it's it's enormous if that mean they're not competitive I probably aren't very competitive with one another but it also means that if any of them do get in trouble we will have major problems so it's not it's not just is it concentrated to where they're able to extract rent I doubt that we're at that point yet but the research would have to be the thing to tell us on that because this is fairly recent phenomenon this kind of concentration but we are clearly subject to any one of them getting in trouble which would take government intervention I think at one time even 30 years ago less so but we did bail out continental to some degree didn't right right and so one of the things that influences policy is politics and so I'm curious if in banking regulation today and in recent years has the politics of banking regulation in a sort of straight you know if you're on one side you favor less regulation if you're on the other side you favor more or is it somewhat more nuance to than that are there certain regulations that to have more bipartisan support or less support across the board well I think it I don't think it's that different than other industries you have those who are very like I say very administrative really oriented well-managed from the top and we'll make sure they do the right thing and loan to the right then I think that's probably harmful at the same time I think people will argue it's a free market I think they're misleading themselves if not the more broadly because you can't have this size of of a subsidy and considered free market so that's why I've argued that us focus on Prudential standards I don't think at this stage even they would you stop a system event from taking place but it would internalize the subsidy to where it's not as generous as it otherwise would be and I think that's where we ought to concentrate I I did propose simplifying the structure I you know I let's let's force a broker-dealer out let's set up a separate organization where that could fail and not bring down the bank but that has there's no appetite for that yeah in this country so that means we are going to have these institutions they are going to continue to be dominant I think they're going to grow even more so in time for right now there's you know you don't see the merger activity even for them the next year down but I think that's a matter of time they're still not everyone has forgotten the crisis of 2008 not everyone is happy that we have these large institutions so that's that's holding the pack but they have a significant advantage over others that is that the tier of commercial banks Super Regionals and regionals have about 200 basis points more intent in ownership equity tangible than the largest that is a nice competitive advantage and lower cost of capital to the largest institutions which means they'll win the game and so when that opens up I think they'll be in a position to acquire I think they will I think we'll see further concentration I don't know when it's too much but I do worry that it may we may kind of drift that way over time okay so I've got one more on banking regulation than a couple on monetary policy and so others I hope will think of questions during the time but on the banking regulations so FDIC derives a fair amount of their revenues from premiums right for this insurance yes some banks and that insurance banks are paying for it in the event that things go south and then that would provide insurance to their depositors up to $250,000 per depositor is it your sense that that relationship between the price of the insurance and the risk that the bank is taking on influences their behavior to a significant extent is it because one of the things would be have that risk-based pricing so that banks don't push the envelope too much on risk is that dude is it your sense that that I just don't have a sense of the formula for it and how it works well let me first start there there were many years where the FDIC's insurance was a flat rate right for everybody has name rate same rate so there was no no deterrent to risk take in fact those who would be safer we're subsidizing those who are less safe right in recent years we have been given the authority to risk base our premiums and we've begun to do that and we have we have a pricing mechanism for the very largest and pricing mechanism for all others because of the difference in the breadth of activities now we are that is a very what we don't just change we're not an insurance company can just change price when we see the risk go up we have to go through a notice of rulemaking and all that and that becomes by the time we get the price changed the whole risk or risk framework has changed so it's slow and cumbersome but it's better than nothing and but I don't think it's had much of an impact on the risk appetite I don't think it's i think the subsidy is just still too rich now over time that may I hope change but I don't see it happening very quickly I'm pretty sure that if you FDIC had a bunch of data from before risk-based pricing to after and with data on the banks and you wanted someone to analyze it that we'd see per that helped you out with that so just let us know if you need to see whether it did move the needle and if policy could be better well and what we do and as we collect data because this is fairly new this the level of pricing that we've been able to do we've had it for a while but but we've only more recently gotten the ability to to be more intense enterprise and so it'll take a while to get the data but yeah I'd love to I'd love ready the answer if it makes it how do you you know how do you know when you got it right right we we're guessing right now there's no we do it super yeah I got the message huh take a note so on monetary policy so I looked right before coming down here to point nine five percent is a ten-year rate and it's quite a bit higher than it was sure yeah many months ago so I'm curious to hear your thoughts on recent changes in monetary policy I mentioned to you earlier I think was 13 months and two days ago we had Janet Yellen through here John Taylor was right there and 12 days later look here today that raised the Fed raised interest rates and that that's that's also what we do so I'm curious your thinking on the pace of the recent rate increases you have a lot of experience on the FOMC and and then so maybe you can talk a little bit about what you've seen over the past year year and a half and what what we think lies I had well just thank you I'm happy to answer that let me first give context I I was known as a I opposed the movement when we were in the crisis I was very much for putting the liquidity into the system I don't think we have any choice but when the recovery started in late in third quarter 2009 I said let's start tapering back back then so we don't get down to zero and quantitative easing because I think once you set an equilibrium around zero and and you put all the expectations around that you have a new equilibrium even though it may be unstable and so but we went ahead and did it so now we have this long period of near zero interest rates with a balance sheet that's been enormous four trillion from less than a trillion so there we are so people said well now you would expect you would want them to move quickly and I said no you don't once you get an equilibrium you don't shock your economy out of it without creating the very crisis that you were trying to avoid so I think Janet and the FOMC have done a pretty darn good job of it now there you can debate whether they ought to been a little more assistant in 2016 I'll let you argue that but since then I think they've been you have to be careful I think you have to bring it slowly out you're gonna let your balance sheet kind of roll off I think that's the right policy and I think they're gonna have some the tough calls are ahead because of inflation moves up and they're doing this gradually then they're gonna say I'm a behind their care curve if I if I move too quickly why put us into a spin that'll stop the inflation but also heard a lot of asset values and there'll be consequences to that so they have some really tough decisions I think at this point they're a gradual approach which I suspect jpowel the new chair will follow don't know that but I suspect he will is is the right policy you've got an economy that's got to adjust gingerly in my opinion otherwise you will pay dearly I mean consistent with that if you look at the trajectory of the Fed's balance sheet yep sort of seven hundred eight hundred nine hundred billion before the crisis then up over four trillion but it stayed pretty flat it has not been sort of following at a but you'd think that that is a gooda protect that very so yeah I think they're gonna they're gonna roll that off very slowly because it's it's a form of tightening there's no question because who's gonna especially if you're if your deficit is going to grow the supply is going to be up so the interest rate should rise how much of that how much can you afford to absorb those are all big questions that they have to think about and if you're rolling your if you're shrinking your balance sheet more rapidly when that environment what are the consequences of that I know they're studying that I don't know what their answers are right now obviously but those are the sorts of things that got to be entering the picture big time right now okay so my last question before opening up for you is when you look out at the economy generally financial sector specifically what are you most worried about I thought this is going to sound trite but I'm worried about the assets that are being placed on the books of banks that are going to be future problems because as I say as the as the risk appetite grows I've seen some of the in the regionals in the smaller banks the commercial real estate is now Katie bar the door okay it's very very substantial and the largest you see some of the leveraged lending back in some of the other activities you know there's a what I'll call court debate on collateralized loan obligations there are different than collateralized debt obligations you don't have to have retention rules risk retention rules originate to distribute what are they doing who's going to buy it where is it going to be place and how much liquidity is that going to demand at some point I don't know the answer to those that's why those are the sorts of things that I follow and worry about but at this stage as always I worry about them but I'm not doing anything about it okay okay with that let me open it up for questions from our audience let's start by Karen Jim supervisory function over time where you analyzed according to camera ratings plus risk as that got better or worse since 2008 and you see more bad my impression is a lot of banks are put in the top category number one now like never before yeah the examination process is is a interesting one the way we examine regional banks and smaller banks is fairly intense we do we it's surprisingly intense in some ways because we do look at their assets we do mark down some of the practices and so forth the largest the very largest we do a little more under the s ress test method and that probably and we have people on site that's probably a little more of a guessing game even though they say it's very intense you look at all this material but we don't we don't test the systems as intensely as we do the smaller ones so I think there we could find yourselves surprised more likely to find yourself surprised than not surprised at some future point that's where management is the key I hope they're doing a really good job we're testing it that gives us some some sense of confidence but it's it's more it's it's it's let I have less confidence in it than I wish I could have I am a little worried about it okay Jeanette hi so one of the things in 2008 that I remember is or actually prior to 2008 was the the the concern about the what I'm gonna call the non banking banking industry and that comprised Goldman Sachs Morgan Stanley and others who are now banks against their best guess against their what they wanted to do but they got folded in right I suspect in this audience a lot of people on the financial footprint picture we're surprised to see State Street so large I think that must be because of the custodian yes so whether but you're not putting fidelity up there for example right so whether it's fidelity or whether it's crowdsourcing via Bitcoin how worried are you about the non-bank banking sector that you're not really regulated yeah I it's a very good question and my answer that is I probably should be more worried than I am but they're they're you're investing and the investor knows you know if it's going to be marked down on a daily basis they understand the risk better and at least they should understand the risk better and I think that's a pretty good discipline on on how they operate especially with operational risk State Street was a custodian it was using its custodial assets to rehypothecation we were landing sixty to ninety billion dollars a day during that crisis so they they were really influenced by the lack of confidence as people needed their money back right away I didn't see that in the others I'm often told that you know Lehman was not a commercial bank and they're right however I think those investment banks Bear Stearns and Lehman and even the others were becoming more more like banks as the as the commercial banks became dominant in the investment banking business so what you had was you got the rules changed where you could take a long term asset a mortgage and you could use it in a repo against a short term liability and you were spinning that so that became a deposit essentially so when the crisis came the liquidity ran you have these hats so the problem is a minute mediate and I think that's that's really what happened they became more Bank like but we we didn't acknowledge that until the crisis and then they were made banks the ones that survived I think there was another mistake made in that where I think we could have I think we could have made a real difference now it's it's a counterfactual I can't do anything with that but Bear Stearns was bailed out I just don't understand because it was relatively small investment bank Drexel would there wasn't bailed out it failed in we got through it fine and there was a lesson learned but we bailed it out and that's signal to the market that LeMans would be bailed out it was under pressure and so if you're and then if your money fund you know what's going to be bailed out you're going to get a really great return so you put your money there and lo and behold they aren't bailed out so now no one knows what to do the crisis has made so much worse so let's be number one understand that fidelity Blackrock so forth are not banks those investors know what they're doing they know they're going to get if it goes south they're going to get less than they had hoped for will that cause a panic depends on how much the banks are lending to them that they'll take the loss that's where you know you get the that's where you get the systemic effect through the bank and I think that's what we have to focus on I may be wrong on that but I I suspect I I feel pretty comfortable with that approach so right back here so yeah thanks Tom if the various agencies that implement the Volcker Rule have different views about how to implement it going forward what's the process by which the agencies get together and either reach the same conclusion or is there some other way that they implemented differently one agency from the other yeah a very good question because it's almost like a legislative process right but we do have staff that the the agencies work through the staff originally try and come to consensus and then bring it to the so called principles and hopefully come to a consensus now one of the issues is should you put rule writing in only one agency now I will this is personal opinion only but my view is the Volcker rule should be simplified greatly and that is no prop trading and you can't own the hedge fund all right that's what the rule says we expect you to and we assume you're going to and if we examine you and you're doing something else we'll call you to it you don't need this reams of paper we presume you're in compliance unless we find evidence to the contrary get rid of all this other stuff one other thing I want the CEO to test that they have policies and procedures in place and that they test them through internal audit and they're confident and they're willing to sign off on that now they're going to get serious I don't need 15 you know the own I think this is still true the only instance where we found violations of the Volcker Rule is when the CEO wouldn't attest that's great okay we expect you to obey and they do and they won't sign what do we need all this paper and hundreds of thousands and millions of dollars go into collecting that data that it's not useful I I could I could do simplify it a lot and so one of the debates I think will be in the legislation whether you place rule writing in one agency and then the others carry it out I think that's reasonable I just the one thing I would insist on is that you keep the attest station put your money where your mouth it or your signature and your livelihood we've got a question right over here our doctor Hoenig it's yes to me that during the crisis in this aftermath that there were there was a trade-off in it seemed like the largest banks took they said well suffer more regulation as long as we don't have to raise equity capital right and now we're in a more D regulatory environment and they don't want to do either and I'm I'm a real pro-business guy but I think that our own professor admati who might even be here she's here in the back a I mean she if there she is you're gonna hear my favorite that that she was you know her work was criticized as being simplistic or impossible or impractical but the fact of the matter is is there's a trade-off now more in sort of more of an observation but I want to know is there any possibility of trading less regulation for more equity kappa wonderful question i there is but it's it's for the smaller banks this recent legislation in the Senate proposed was highly capitalized Bank so for a smaller regional bank for breezing banks and smaller banks you had 10% you got rid of the Basel capital requirements you got rid of some of the qualified Mortgage things you get simplified in a lot the largest banks in the house have a bill called the Choice Act which said if you maintain 10% then you get this they didn't want that for 10% when you're at six ten percent say a long way to go and if you think about it for all the issues around the resolution process and all the paper that's filed and that's expensive but think about how you affect your roee by a 1 percentage point drop in the equity capital requirement it swamps that so I'm never as a large bank I'm never going to trade 10% for less regulation because I've operationalized it i simplified it into a process I've learned how to read the regulator and so I I mean I've read I tried to read is a better way to describe it the resolution plans and they're they're just just incomprehensible and not not because not because their meaning to be that way but these institutions are so complicated you can't hope to really I don't I don't be willing to bet their directors have no idea what's involved in that so I would be happy to trade it I think the market if it weren't for the wonderful subsidy that's there the market would require more capital of them in the crisis the the ratio that the market I was told by the investment market looked at was the tangible capital asset how much do you have before your insolvent that's the only question and when they realized it was less than three percent they got they got worried but I don't think it has much chance ok there and then Peter or Peter your doctor hey thanks for coming to see I'm sure earlier in the discussion you seem to indicate the investor knows approach is adequate for capital markets however two things come to mind in a curious ear perspective first is the financial crisis may have been caused by shadow banks which are an investor knows concept and second last week or two weeks ago VIX products resulted in a fire sale of equity markets and you know many trillions of dollars of market capitalization went away can the government how do you think about the government's ability to attack that problem are their regulators thinking about this problem and from a banking regulator point of view does it matter or is it okay that if the markets can do whatever they want as long as the banks are ok as a banking regulator we shouldn't worry about it I don't know how that my personal view is I do believe in markets and I think I think the market on its own you know it there's no formula that it uses but it when it's willing to how much how much is it willing to invest depends on how much confidence it has in the institution that affects the cost of capital and so forth and I think it would require more because if I want credit if I'm a creditor or an investor and I think it's likely to go bust or if I'm a creditor and I know it doesn't matter if it goes bus I'm gonna get my money back which I've been proven to me several times the discipline is gone right so you the very self-confident CEO and team can do some pretty risky things and they source of funds right there so uh so I just would that's why I wanted Prudential standards I want the capital ratio to be something that I saw at least the market demand of them before you have the safety net so great then let the market work and I don't I don't think the government can write a resolution plan that will work I'm not sure the bank can because if you have capital you'll have time to default that you can try and get through and reorganize and if not it's more - more likely to be idiosyncratic and systematic no not necessarily I realize we've had crisis in our history before but at least the market is driving it and I think the government comes in to help the economy it comes in to mitigate the systemic consequences of those mistakes I don't know that has any choice but I think it has to come in too soon now with such low levels of capital so professor Ahmadi I thank you so you were in the Fed system for a while and now you're an FTA see I think that you know I try to draw out of you agreeing to the what the Fed is and isn't doing that it's required to do under dodd-frank for example title 1 actually gives them as as an entry point their living wills living wills were there to point to who can't fail through bankruptcy and whoever can't and the Fed can do whatever they want break them up more capital all of that then you have the Senate saying not some senators bipartisan saying getting everybody to agree to take away the subsidies unanimous decision in nineteen in 2013 and brown and Vitter two odd pair of senators proposing something the Fed can do already so there are a few there's a list of failures on the part of the Fed that I think FDI T should yes it should scream about and I think you have been but because it falls on you I think before the crisis Citigroup which is our poster child of too big to fail you know Wayne bailed out numerous times over its history was insolvent except for the deposit bank and somehow now you know the the Fed is in a position of you know dealing with governance issues saying oh you know the boards are too burdened by matters requiring it you know attention and we should instead of using every symptom in the book to say something is really wrong with these institutions dodd-frank told us to take care of that problem and we are in charge of bank holding companies that are systemic every institution that systemic and we know who the top six are and the Fed is not really using that authority can I get you to comment on that kind of McGregor water first look I I think the the Federal Reserve is the supervisor of the bank holding companies and the Federal Reserve could require that they hold more capital I mean that's one of the options you have they are whoever they are but the Fed has engaged now remember it's not just the fact they've engaged in this international process called Basel Europe is far less and then so you have to worry are you are you going to disadvantage I know that's called competing to the bottom I know so those are all the all the factors that are involved in there but I've said we have the stronger capital we're winning on the international front we could do more but I think it's unlikely I think if we keep what we have now given the boom times that we have if I could just lever a little more I could get my hedge fund returns of 20% or 25 again those are the those are the counter weights to that but I I mean they could but I don't see it I what I want them to do is not let it go back down to three because that is a prescription for repeat whatever the source of the shock it's hard to withstand with only that much capital remember that's like that's like building a 100 storey tower with no foundation I'd like to use that terrible metaphor okay I'm not no why don't we wrap up so please join me in thanking dr. hunt [Applause]