FDIC's Bair pushes for regulatory changes

The head of the Federal Deposit Insurance Corp. on Monday said Congress needs to provide regulators greater tools to control the risky financial behavior that helped trigger the recession and to unwind major firms on the verge of collapse.

FDIC Chairman Sheila Bair said she supports such a winding-down process for financial institutions other than banks. But she does have reservations with a proposal now before the House, which would cover the costs for the government of dissolving troubled companies with fees charged to businesses after the firms' meltdown occurred.

Bair says that fund should be created before a financial institution is engulfed in a crisis.

"Building the fund in advance would help prevent the need for assessments during an economic crisis and ensure that the firm that failed paid something into the fund," she said at Kansas State University as part of the Landon Lecture series.

The process would be overseen by a systemic risk council, which would have the authority to force large companies in danger of becoming unstable to sell off assets or stop business practices the council members considered risky.

Bair said that council could step in to fill gaps in the current regulatory framework and should be independent of any government agency. The current proposal favors oversight by the Federal Reserve.

Republicans have opposed the plan, maintaining that taxpayers would still be responsible for bailing out the companies.

While Bair believes government involvement in the markets is not always the answer, she said it's necessary now given the lack of oversight that allowed the financial problems to drag down the economy.

"Without the ability to end the losses on systemic financial institutions that get into trouble, we run the risk that we will have to repeat the costly and unpopular taxpayer (bailouts) of the past year," said Bair.

The Obama administration and Congress have proposed a sweeping overhaul of how the government keeps an eye on the nation's banks and largest financial institutions. In a bid to eliminate the patchwork of federal regulators, which critics say allowed some of the biggest business failures to slip between the cracks, reformers want to streamline the process with fewer entities responsible for more parts of the market.

On the consumer front, Bair said she supports a new agency that would focus on consumer financial protection issues, such as payday loans, check cashing services, bank fees and the unconventional mortgage loans that helped fuel the real estate bubble and its eventual collapse. She denied that reform would hinder innovation, as some have suggested, saying abusive practices need to be eliminated to help consumers make informed choices and help the economy rebound.

"Some want us to keep the status quo and by extension they want to keep the taxpayer on the hook," she said. "That makes me angry."

The FDIC is an independent agency charged with guaranteeing the safety of customer deposits in federally chartered banks. Through Friday, the FDIC has closed 115 banks this year. In 1989, during the savings-and-loan crisis, the FDIC closed 534 banks.

Bair said she doubted the flood of failed banks will peak before next year and will continue to weigh on her agency's federal deposit insurance fund, which covers depositor losses. The FDIC has levied a special one-time fee on U.S. banks earlier this year and has proposed asking banks to pay in advance $45 billion in regular premiums that would have been due over the next three years.

Taxpayers have not had to pay for resolving the failed banks. Depositors' money has not been at risk, with the FDIC guaranteeing up to $250,000 per account.