Big banks like Bank of America and Citigroup should be reclassified as 'government-sponsored entities' and have their activities restricted.  "That's what they are," according to Kansas City Federal Reserve President Thomas Hoenig, speaking at the National Association of Attorneys General 2011 conference. 

After all, the 2008 bank bailouts at the height of the financial crisis and other implicit guarantees effectively make the largest U.S. banks government-guaranteed enterprises, like mortgage finance companies Fannie Mae and Freddie Mac.

        Speaking From Experience.   Mr. Hoenig began his career in the Fed system in 1973 as an economist in the bank supervision group.  He's currently the longest-serving Fed bank president, although he will step down as president of the Kansas City Fed in October. 

The K.C. Fed president has constantly railed against the government's decision to rescue the biggest banks, and has criticized the Fed's easy money policies.  Instead, he'd rather allow them to fail.  His views, in part, were shaped by the S&L crisis of the 1980's, when banks were shut down because they were over-invested in real estate.  Hundreds of banks failed, which necessitated a massive government bailout. 

Mr. Hoenig says that banks still are not adequately prepared for the next financial crisis, despite new capital rules requiring lenders to raise billions of dollars to buttress against future losses.  The proposed Basel III capital requirements - which demand as much as 8% core capital ratio - will not be enough to weather catastrophic losses;  "That is far too little capital with this complexity and this risk profile."

        Little Chance of Reclassification.   That said, there's little chance his reclassification proposal would be adopted.  Eighteen out of the 19 biggest U.S. banks have repaid 2008 bailout aid, removing most government investment over the last 18 months.  And the big banks will fight "tooth and nail."  BofA CEO Brian Moynihan rejected the notion that the largest banks should divorce their commercial and investment banking operations, saying:  "I think customers want it together."  He further sees the combination as necessary to effectively serve large American companies with global operations.   [Reuters, 4/12/11]