Bair Says Systemic Risk Council NeededThe Chairman of the Federal Deposit Insurance Corp. sees a change is needed to oversee big institutions that may put the entire economy at risk.
Sheila Bair's comments came a day before the stress test results of the nation's 19 largest banks were to be made public. She testified before the Senate Banking Committee yesterday. Bair says new powers are needed to oversee these companies and proposes an authority could be formed by the top federal banking and investment regulators.
The "too big to fail" model used by the government rushed into place to rescue huge financial institutions caught up in the global crisis last fall needs to be replaced with a more system wide monitoring approach, Bair says.
"Our current system has clearly failed in many instances to manage risk properly and to provide stability," she states, "We're talking about a resolution and not a bailout."
Bair suggests a new authority be granted to the FDIC from Congress to take over and resolve bank holding companies like Citigroup Inc. or Bank of America Corp. even before the regulatory reform is complete. Currently, bank holding companies are regulated by the Federal Reserve. The FDIC now can only take over and resolve the subsidiaries of bank holding companies that hold federally insured deposits (FDIC insured deposits.)
Of the 19 banks that will have stress tests results released, none of them will be allowed to fold, regulators have already stated. Bair says "I think this will be a confidence-instilling announcement." Some banks will have to raise more capital. Bair admits some will say "we're being too tough, and other analysts will say we're not being tough enough"
Bair suggested the FDIC, the Treasury, Federal Reserve and the Securities and Exchange Commission could form the base of a new "systemic risk council" that would aim to monitor large institutions for the types of risk that set off the financial tsunami that hit markets and economies around the globe last fall. This council of regulators would be best equipped more than a single agency to hold oversight, write rules and set capital requirements and collect data on large institutions that pose a potential threat to the system.