Last month's approval of a purer capital measure for the biggest banks was not only a major step in regulators' response to the crisis, but it also shed light on the clout of two policymakers with key roles in advancing the regulation, neither of whom heads one of the agencies that enacted it.
As members of the Federal Deposit Insurance Corp.'s board, Thomas Hoenig and Jeremiah Norton must largely let Chairman Martin Gruenberg run the FDIC's agenda. But as was the case with past FDIC directors, both Hoenig, the agency's vice chairman, and Norton have still found ways to influence policy.
The two come from different backgrounds Hoenig with a long career as a bank supervisor and central banker highlighted by his outspoken criticism of "too big to fail", and Norton having worked at JPMorgan Chase following a stint at the Treasury Department, where he worked on the government's response to the 2008 meltdown. Yet many of their positions since coming to the FDIC board have been similar, most notably on where to set a supplemental leverage ratio for the big banks.
"The interesting thing is the two of them seem to be more consistent than we first thought on several issues," said Christopher Cole, senior regulatory counsel at the Independent Community Bankers of America. (Neither Hoenig, Norton, nor Gruenberg would comment for this article.)
Hoenig, who ran the Federal Reserve Bank of Kansas City for 20 years before coming to the FDIC, is well-known for speaking his mind on financial policy issues, often using public speeches to draw attention to proposals he supports. His comments often critical of the big banks tend to draw a contrast between him and Gruenberg, who after a Capitol Hill career as a senior aide to former Sen. Paul Sarbanes appears to favor a more behind-the-scenes approach.
"The Hill is all about compromises. It's easy to stake out a position. It's much harder to get something done and move it forward," said former FDIC Chairman Sheila Bair, Gruenberg's predecessor who was also a congressional staffer. "Marty is very used to that give and take inherent in the legislative process. Tom had his own shop as head of the Kansas City regional bank, and those banks have a lot of autonomy. Those different experiences bring different kinds of strength."
Norton, meanwhile, is the one FDIC board member to have worked at a private bank. But before he was an executive director in a JPMorgan securities unit, Norton was deputy assistant secretary under former Treasury Secretary Henry Paulson, where he was involved in crafting the 2008 banking bailout.
"He enjoys getting into the weeds of policy matters. His experience at Treasury in the crisis and knowing that the U.S. did not have the proper tools to resolve and supervise the systemic institutions at the time probably plays a role in what his views are now," said a source familiar with Norton's time at Treasury.
Nowhere has their impact on the board been seen more than in pushing their fellow U.S. regulators to back a higher leverage ratio than that established in other countries. The international Basel III capital accord requires nations implementing the rules including the U.S. to set a minimum 3% supplemental leverage ratio on top of other capital benchmarks.
But Hoenig and Norton, in speeches in 2012 and 2013, argued that was too low. They articulated a growing concern that a higher supplemental leverage ratio was needed as a more accurate reflection of capital health in light of concerns the broader Basel III framework still allowed banks to adjust capital levels based on risk weights that critics say proved disastrous in the crisis.
Speaking in September 2012 at the American Banker regulatory symposium, Hoenig called on U.S. regulators to "reject the Basel approach to capital and go back to the basics." In a speech the following February, Norton focused on the leverage ratio, saying "it is difficult to argue that [a 3% leverage ratio] is significant reform."
To be sure, the FDIC one of three regulators along with the Federal Reserve and the Office of the Comptroller of the Currency tasked with implementing the capital rules has long supported a strong leverage ratio, and Gruenberg later echoed Norton and Hoenig's earlier comments. But observers credit the two FDIC board members with forcing policymakers to focus on the issue.
"The clarity of public statements that Vice Chairman Hoenig and Director Norton have made have been very helpful," said Simon Johnson, an MIT professor and former chief economist of the International Monetary Fund.
But they also played significant roles in the eventual negotiations over the final U.S. rules, many sources say.
In July 2013, the U.S. regulators considered two key steps forward. One was to issue an "interim" final rule implementing the Basel III regime. (The rule would make Basel III official for U.S. banks, but regulators could still enact subsequent changes after it had become effective.)
The other step was a proposal to accompany Basel III with a higher leverage ratio of 5% for the largest bank holding companies, and 6% for their insured subsidiaries. But getting the higher leverage ratio to a final implementation stage would take additional months of discussions and public comments.
While both the final Basel III rule and the leverage ratio proposal passed the five-member FDIC board, Hoenig opposed implementing the broader Basel III regime, saying it was insufficient to have one of the measures finalized without the other. "The Basel III standard without a binding leverage constraint remains inadequate," he said at the time.
Although Norton voted in favor of both measures, sources say he was sympathetic to Hoenig's position, and even considered opposing the Basel III framework without a higher leverage ratio in place. (The leverage ratio rule was finalized last month with all five board members supporting it.)
"Jeremiah really deserves some credit for voting for an interim Basel III rule. My guess is that was a hard vote for him," said Bair, who also supported a strong leverage ratio while at the agency. "He articulated at the time some of the problems with the rule, but he knew that to move the process forward which was necessary to get the Fed to move too he needed to step back and cast a tough vote."
Some said Norton's vote was pivotal for a potential reason unrelated to Basel. On paper, the FDIC could have passed both measures without Hoenig and Norton, since Gruenberg had support from Comptroller of the Currency Thomas Curry and Consumer Financial Protection Bureau Director Richard Cordray, who both have board seats.
But, at the time, Cordray lacked Senate confirmation as CFPB head and some worried that a legal challenge to his recess appointment could have put his FDIC board votes in question.
Meanwhile, Hoenig and Norton's public resistance to going forward on Basel III implementation without a full commitment from regulators on the leverage ratio strengthened the FDIC's hand.
"Marty handled it well in terms of using their reluctance" about Basel III "as leverage with the Fed, because the Fed clearly wanted to get Basel III done," Bair said.
Bair noted that Hoenig and Norton's vocal support early on for moving the leverage ratio gave Gruenberg the ability to work behind the scenes in negotiating with the other agencies. "Make no mistake about it, Marty wanted to get the leverage ratio done," she said. "But if he staked out the position it may have been harder to get the rule finalized. He was committed as anybody to the leverage ratio, but it was his job to bring the Fed along."
Another source familiar with situation, who spoke on the condition of anonymity, agreed that "although all FDIC Board members supported the leverage ratio concept, Gruenberg's sense of timing and negotiating were critical to its adoption."
Yet Hoenig's outspoken views sometimes also appear to express skepticism of policies supported by the agency he helps lead. For example, even though he supported a strategic document the FDIC released late last year outlining how the agency would use Dodd-Frank Act powers to resolve a failed behemoth, Hoenig has at times questioned whether the Dodd-Frank provision which allows the FDIC to access Treasury liquidity to manage a resolution will work.
While the Dodd-Frank provision "drives toward resolution and requires that stockholders and some long-term debt holders lose their investment, it requires public assistance to make it work," Hoenig said in a May 7 speech, in which he argued a better approach is for banks to become easier to resolve through bankruptcy. "Unlike in bankruptcy, the Treasury is empowered to fund short-term creditors who, for example, would avoid becoming general creditors as they exit at the firm's operating units -- broker dealers, insurance companies, finance companies, trading companies that remain open. This only serves to perpetuate too big to fail, incentivizing creditors to redirect their investment from the holding company to the affiliates, where they will be 'safe'."
Cole said Hoenig is setting a new bar for how vocal an FDIC No. 2 can be.
"Compared to other past vice chairmen, he has used the pulpit more and has been more vocal in his speeches, certainly more so than Gruenberg and John Reich were when they were in that role," he said. (Reich preceded Gruenberg as vice chairman before heading the now-defunct Office of Thrift Supervision.)
If there is disagreement on policy issues between Gruenberg and his inside directors, that is somewhat by design. By law, no more than three members of the board can be from one political party. The restriction is meant in part to foster political balance on the board. Hoenig, who is not affiliated with a political party, and Norton were recommended as nominees by GOP congressional leaders.
Some observers said the current board has succeeded in focusing on issues that unite them.
"It's a credit to all the three of them that, while there may be a diversity of views between them, they're able to find commonality to achieve the higher goals they agree on," said John Ryan, the chief executive of the Conference of State Bank Supervisors.
Others said the board's political balance gives the FDIC somewhat of an advantage in negotiating with other agencies.
Gruenberg's "background is the Democratic party, and Hoenig has connections with the Republican party in the Senate. There is political balance," said Kenneth Guenther, who formerly ran the association that became the ICBA. "They are well-positioned in terms of having an approach and a positioning independent of the Federal Reserve Board."
Joe Adler is the deputy Washington bureau chief for American Banker