UPDATE 1-Fed’s Hoenig: "too big to fail" hurts small banks

(Adds details from prepared testimony)

OVERLAND PARK, Kan., Aug 23 (BestGrowthStock) – The viability of
community banks is threatened by policies that have conferred
“too big to fail” status on larger banks, reducing their cost
of capital, Kansas City Federal Reserve Bank President Thomas
Hoenig said on Monday.

Hoenig, in prepared testimony to a field hearing of the
U.S. House of Representatives Subcommittee on Oversight and
Investigations here, said the community bank model was still
viable, especially if allowed to compete on an equal footing
with larger banks.

Hoenig’s prepared remarks did not address Fed monetary
policy or its outlook on the economy. Hoenig has been the lone
dissenter on the Fed’s policy-setting committee in recent
months, arguing the economy is beginning to recover and that
the Fed should end its pledge for an extended period of low
interest rates and start to shrink its balance sheet.

He said community banks had been tested by the “abnormally
slow recovery” that the U.S. economy has experienced over the
past two years and continued to face difficulties. “Commercial
real estate, particularly land development loans, will be a
drag on earnings for some quarters yet,” Hoenig said.

Community banks are generally considered those with less
than $10 billion in assets, which account for all but about 83
of the 6,700 banks in the United States, he said. All but three
of the 1,100 banks based in the Kansas City Fed district are
community banks.

“Community banks will survive the recession and will
continue to play their role as the economy recovers,” Hoenig
said. “The more lasting threat to their survival, however,
concerns whether this model will continue to be placed at a
competitive disadvantage to larger banks. Because the market
has perceived the largest banks as being too big to fail, they
have the advantage of running their business with a greater
level of leverage and a lower cost of capital and debt.

Hoenig said that despite provisions in recently enacted
landmark financial regulatory reform law to seize and shut down
failing big institutions, the markets will continue to perceive
many large banks as too big to fail, giving them lower
operating costs than community banks.
(Reporting by Carey Gillam, writing by David Lawder; Editing
by Chizu Nomiyama)

UPDATE 1-Fed’s Hoenig: "too big to fail" hurts small banks