Thomas Hoenig's penchant for speaking his mind has clearly not abated since he came to the nation's capital.

Just days after he told American Banker's Regulatory Symposium that Basel III should be scrapped, the Federal Deposit Insurance Corp. board member-speaking to a club of financial policy thought leaders last month-said bankers do not fully appreciate the public's rebuke of their industry or the market advantages big banks still enjoy over their competitors. (American Banker is a sister publication to Bank Investment Consultant.)

"It is alarming that some CEOs of some financial firms fail to grasp why they are trusted so little nor appreciate the reputational damage they caused their industry," Hoenig said in remarks to the Exchequer Club. "They acknowledge very little offense in taking a public subsidy and squandering it in a series of actions that place billions of taxpayer dollars at risk."

Hoenig has been outspoken since his days leading the Federal Reserve Bank of Kansas City, and his proposal to separate broker-dealer activities from firms' commercial banking was controversial. His April appointment to the FDIC's board - he is also the administration's nominee to be the agency's vice chairman - has only amplified his megaphone. His speech at last month's symposium turned heads for its denunciation of proposed Basel rules for new capital standards. But his speech to the Exchequer Club focused on his proposal to break the bond between the largest firms' bank and nonbank affiliates, which would bring back a framework more similar to that of Glass-Steagall.

"In my experience, the majority of CEOs of large and small banks act with integrity in carrying out the duties of their profession," he said. Yet, he added, "Bankers, like all of us, react to incentives, and they react to the incentives that are placed before them."

The proposal, which Hoenig unveiled last year while still leading the Kansas City bank, would restrict commercial banks from high-risk trading, the use of derivatives and other broker-dealer practices. That would limit, he says, the ability of institutions with FDIC backing to unduly expand the safety net.

"The proposal I have submitted would return the public safety net- deposit insurance and the discount window and the implied guarantees - to the purpose for which it was intended: protecting from systemic disruptions the payments system and the intermediation of funds from depositor to borrower that is . commercial banking," Hoenig told the audience.

He said despite the industry's losses in 2008 and 2009, and extensive new regulations enacted in the Dodd-Frank Act, the system is still at risk. He cited recent problems at large institutions, including accusations of interest rate rigging.

"What is particularly troubling to many is that activities leading to the crisis continue today-and continue to be subsidized-well after the lessons should have been learned," he said. "Home mortgage loans that had been extended using irresponsible underwriting were foreclosed on without due process. Some of our largest financial institutions misled the markets regarding interest rates and profited from it. These rates still affect borrowers today.

"Firms using FDIC-insured funds continue to make directional bets on asset values and global events, made even more objectionable by ineffective risk management practices."

Hoenig said some firms "also fail to appreciate how in so many ways it seems that the game is fixed in favor of a privileged few."

"The public is aware that there seems to be no accounting for the enormous damage inflicted on our economy. It is difficult to understand how this could have happened in a country like the United States, or how it is possible that a satisfactory solution has not been fully implemented."

In contrast to other regulators, who strive to stay clear of references to specific institutions, Hoenig illustrated his point about an overextended safety net by alluding to Citigroup, although without actually naming the company. He brought up a recent advertising campaign by a big bank to mark its 200th anniversary, but Hoenig said the campaign overlooks a few details.

"In several recent television commercials, one large bank is advertising its celebration of 200 years in business. I congratulate them. But it is well documented that this bank has received U.S. government support four times in the last 100 years. What does that say to the small business struggling to succeed and wanting to expand?" Hoenig said. "We have slowly, perhaps unintentionally, expanded the safety net and its subsidy beyond what is justified to serve the long-run interests of the economy. [What] started as a means to providing stability to the payments system and intermediation process - both vital to our economy - has become a tool for leverage and a subsidized expansion into activities that has led to greater instability."

Hoenig also called out policymakers. Regulators lost sight of their core mission to examine institutions in the period leading to the crisis, and the mound of new regulations enacted in Dodd-Frank will only add to banks' burden without making needed structural reforms to the system, he said.

"I suggest that despite hundreds of added regulations, the incentives facilitating the excesses leading to the crisis remain largely unchanged. The reason is that the fundamental cause of the problem has not been fixed. The government safety net has actually expanded to more firms," he said. "It protects firms engaged in the payments system, intermediation process, asset management, and broker-dealer activities."

Even though Dodd-Frank includes the Volcker Rule, a provision first proposed by former Fed Chairman Paul Volcker that is seen by many as drastically curtailing large banks' ability to profit in the trading markets, Hoenig said the rule - which essentially bans proprietary trading - is still open to gaming.

"Despite the Volcker rule, the safety net will continue to cover most elements of derivatives trading and market-making activities, much of which could become veiled prop trading," Hoenig said.

His structural proposal would more adequately address the system's persistent risks. "The proposal I have put forward serves to reduce what is protected by the safety net and realigns incentives so that the market has a much greater impact on the outcomes," he said. "Continuing the safety net the way that it was separating banking from broker-dealing will not eliminate crises, but it will contain them and in the end allow for a stronger, more accountable system."