Thomas Hoenig, vice chairman of the Federal Deposit Insurance Corp., said banks chasing 20 percent returns are aiming too high.
At a Brookings Institution event today in Washington, Hoenig said he believes banks are pursuing such returns and the risks inherent in that goal are more suited to hedge funds. He didn’t identify specific banks.
“If they’ve now targeted a return on equity that’s 20 percent, we have a problem,” he said during a panel discussion of whether some banks are too big or otherwise too important for governments to allow them to fail in a crisis.
ROE, a measure of how well a company uses shareholder funds, was 13 percent in the first quarter at JPMorgan Chase & Co., (JPM:US) the biggest U.S. bank by assets, and 12.4 percent at Goldman Sachs Group Inc. (GS:US), the fifth-biggest, according to the New York-based firms’ filings with the U.S. Securities and Exchange Commission.
Former Merrill Lynch & Co. Chief Executive Officer John Thain, now running CIT Group Inc. (CIT:US), said this week it would be “totally unrealistic” for large, global banks to aim for ROEs in the mid-teens or 20 percent because of new capital requirements and regulations. He said “low-teen returns” would be good.
Hoenig, a Republican member of the FDIC board who was president of the Federal Reserve Bank of Kansas City, said that if banks hold a 10 percent tangible capital ratio -- a leverage goal he said is good for industry stability -- they “can still have a very good return on equity.”
H. Rodgin Cohen, a lawyer who has represented big banks as senior chairman at Sullivan & Cromwell LLP, said that existing leverage ratios have been “woefully inadequate” and need to be “significantly higher.”
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