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Blair: Watchdog needed for too-big companies

The head of the Federal Deposit Insurance Corp. says new powers are needed to oversee companies that become so big their failure would pose financial risks to the economy.
/ Source: The Associated Press

The head of the Federal Deposit Insurance Corp. says new powers are needed to oversee companies that pose financial risks to the economy, an authority that could be shared by the FDIC and other regulators.

Policymakers want to replace the “too big to fail” model used by the government as it rushed in to rescue huge financial institutions caught up in the global crisis last fall.

“Our current system has clearly failed in many instances to manage risk properly and to provide stability,” FDIC Chairman Sheila Bair told the Senate Banking Committee Wednesday. “We’re talking about a resolution and not a bailout.”

And Bair’s suggestion for new authority from Congress for the FDIC to take over and resolve bank and thrift holding companies — before the overall revamp of financial rules is finished — brought a sympathetic response from some senators.

Scores of bank holding companies, such as Citigroup Inc. and Bank of America Corp., fall under the supervision of the Federal Reserve. The FDIC now can take over and resolve only the subsidiaries of bank holding companies that take federally insured deposits.

Thrift holding companies, such as Lincoln National Corp. and Phoenix Companies Inc., are supervised by the federal Office of Thrift Supervision, part of the Treasury Department.

Bair spoke a day before results of “stress tests” on the nation’s 19 biggest banks are being released, an exercise the government said was vital to getting the financial system back on solid ground.

At least three — American Express Co., JPMorgan Chase & Co. and Bank of New York Mellon Corp. — have passed the tests and will not be asked to raise more capital when the government announces the results, people briefed on the results said Wednesday. But about half of the firms, including Bank of America Corp. and Citigroup Inc., likely will be asked to boost their reserves.

None of the 19 banks tested will be allowed to fold, regulators have said. “I think this will be a confidence-instilling announcement,” Bair said at the hearing.

She affirmed that as a result of the tests, some banks will need to raise additional capital. Some observers will say “we’re being too tough and other analysts will say we’re not being tough enough.” Bair said.

Bair, who has been an influential voice through the crisis, called for a new system of supervision that prevents institutions from taking on excessive risk and becoming so large their failure would threaten the financial system.

She suggested the Treasury Department, FDIC, Federal Reserve and Securities and Exchange Commission could be members of a new “systemic risk council” set up to monitor large institutions against the kind of risk that plunged the markets worldwide into distress last year. A “council” of regulators would be better equipped than a single agency to exercise that oversight, writing rules, setting capital requirements and collecting data on large institutions that pose a potential threat to the system, Bair said.

“I’m more attracted to the council idea” than having a singular regulator play that role, said Sen. Christopher Dodd, D-Conn., the committee chairman.

Rep. Barney Frank, chairman of the House Financial Services Committee, and other lawmakers have proposed that the Fed assume the role of systemic regulator.

The Obama administration has presented to Congress an extensive overhaul of financial regulation meant to prevent a repeat of the banking crisis. A pillar of the plan is creating a so-called systemic regulator to monitor against the risks.

The administration also proposes giving the Treasury secretary the power, after consulting with officials at the Fed, to take control of a major financial institution and run it. The Treasury chief is a Cabinet member and official of the administration, unlike the FDIC, which is an independent regulatory agency.

“I just want to thank you for bring sanity into this discussion,” Sen. Bob Corker, R-Tenn., told Bair. “Your embrace of the free market is so different from the Treasury secretary.”