WASHINGTON — On her way out as Federal Deposit Insurance Corp. chief, Sheila Bair told lawmakers that certain capital rules meant for large banks may affect small ones as well, and defended prompt corrective action in the face of an oversight report criticizing it.
Bair, who will step down as FDIC chairman on July 8, said at a Senate Banking Committee hearing Thursday that while the Basel III capital rules target global players, certain requirements — including the quality of capital banks hold — could eventually apply to all.
"Basel III was really designed to address more the capital needs of larger internationally active banks, though certainly there are issues regarding banks of all sizes and their capital adequacy," she said. "The quality of capital definitions of Basel III — cleaning up what we count as capital — I think those will apply to all banks of all sizes."
Bair continued to stress that the Dodd-Frank Act's resolution regime can counteract market belief that firms are "too big to fail," and warned that failure of the U.S. to raise its debt ceiling could have disastrous results.
"I don't understand why we're even talking about getting to that point," she said.
On Basel, Bair said it is still an open question whether community banks will be subject to the same minimum capital requirements of those subject to the international accord. Common equity for institutions under Basel III will have to be 7% of their assets by 2019.
However, if community banks saw a similar requirement, she said, the effect may be limited.
"In terms of the level, whether you need 7% for the smaller banks or leave it at the same place it is now, that decision really hasn't been made yet," Bair said.
She added that, "I would say though overwhelmingly community banks have much higher capital levels already — they're almost all well over the 7%."
"One of the reasons is because they're small enough to fail so the market demands a higher capital level from them," Bair said. "However that issue is resolved I don't think it would have a big impact on community banks. … The capital levels for the entire system need to be evaluated and strengthened."
Bair also took questions about a recent Government Accountability Office report saying prompt corrective action was ineffective in the financial crisis. PCA was created in the 1990s to give regulators regimented steps for handling troubled banks, forcing them to close institutions beyond repair.
But the GAO said the system has not worked, in part because its reliance on a bank's capital standing — which lags other indicators — means institutions are processed through PCA too late to effect meaningful changes.
Bair said PCA has succeeded in preventing regulators from keeping banks open for too long — a notorious problem during the thrift crisis — but agreed improvements could be made.
"On the positive side, we think PCA has worked in the sense that it has taken a lot of regulatory discretion and judgment out of the decision to close a bank," she said. "On the negative side, these failures have still been expensive. There are several reasons for that. One is by definition this is a distressed sale when a bank closes."
Bair said PCA could benefit from more attention to risks banks are taking before they hit the balance sheet.
"If the bank is not looking down the road to see what kinds of losses it may in the future have on these loans, it will be under-reserved and that will overstate its capital position, which will compromise the efficacy of PCA," she said.
