Big banks are government-backed: Fed's Hoenig

CHARLOTTE, North Carolina (Reuters) - Big banks like Bank of America Corp and Citigroup Inc should be reclassified as government-sponsored entities and have their activities restricted, a senior Fed official said on Tuesday.

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, said Kansas City Fed President Thomas Hoenig.

"That's what they are," Hoenig said at the National Association of Attorneys General 2011 conference.

He said these lenders should be restricted to commercial banking activities, advocating a policy that existed for decades barring banks from engaging in investment banking activities.

"You're a public utility, for crying out loud," he said.

The Kansas City Fed president has been a vocal critic of rescuing the biggest banks rather than allowing them to fail. He has criticized the Fed's easy money policies in the wake of the crisis.

There are slim chances his proposal to classify banks as government-guaranteed enterprises 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.

In a later session, Bank of America Chief Executive Brian Moynihan rejected the notion that the largest banks should divorce their commercial and investment banking operations.

"I think customers want it together," said Moynihan, noting he sees the combination as necessary to effectively serve large American companies with global operations.

The longest serving Fed bank president, Hoenig began his career in the Fed system in 1973 as an economist in the bank supervision group. The anti-inflation hawk will step down as president of the Kansas City Fed in October.

Hoenig's experiences shuttering banks during the savings and loan crisis of the 1980s, when over-investment in real estate caused hundreds of bank failures and necessitated a massive government bailout, shaped his views about how to emerge from the most recent crisis.

Hoenig also said banks are still not adequately prepared for the next financial crisis, despite new capital rules requiring lenders to raise billions of dollars to buttress against future losses.

Hoenig said the proposed Basel III capital requirements -- which demand as much as 8 percent core capital ratio -- will not be enough to weather catastrophic losses.

"That is far too little capital with this complexity and this risk profile," he said.