CHICAGO — Federal Deposit Insurance Corp. Chairman Sheila Bair acknowledged Thursday that there are persistent doubts about whether the government really ended "too big to fail" by passing the Dodd-Frank Act, but said it was up to regulators to combat that perception.
In a speech to a Federal Reserve Board conference in Chicago, Bair suggested a lack of sincerity among stakeholders about keeping systemically risky firms in check, and said the market may be headed exactly to where it was before the crisis.
"Unless reversed, we can expect to see more concentration of market power in the hands of the largest institutions, more complexity in financial structures and relationships, more risk-taking at the expense of the public, and, in due time, another financial crisis," Bair said.
Bair called for a broad designation of certain firms as "systemically important."
Under the Dodd-Frank Act, the labeling would allow stronger oversight of such firms by the Fed, and require them to provide information - in so-called "living wills" - to both the Fed and the FDIC to help guide a hypothetical resolution scenario. The law allows the two agencies to force structural changes at firms with subpar living wills, meant to make them more "resolvable."
She indicated a reticence among firms to receiving the designation.
"Needless to say, nobody is signing up in advance to be a" systemically important financial institution, Bair said. "In fact, it is just the opposite. It might be far better to fall just short of SIFI status in terms of size, complexity, and interconnectedness. In that case, your institution would be spared all of the additional regulatory burdens, but policymakers could still face significant challenges in effecting an orderly resolution in a crisis."
As a result, Bair said it's critical that the Financial Stability Oversight Council — a group of regulators created to detect and avert systemic problems — develop "hard metrics" to guide the designation process.
"We need to be able to gather information on a broad range of potential SIFIs in order to develop a sense of the difficulties that might arise in resolving them," Bair said.
Bair said that while reforms in Dodd-Frank regarding resolution authority and planning are "far-reaching, … their ultimate effectiveness will still depend on the willingness of the FDIC and the Federal Reserve to actively use their authority to require organizational changes that promote the ability to resolve SIFIs.
"As currently structured, many large banks and nonbank SIFIs maintain thousands of subsidiaries and manage their activities within business lines that cross many different organizational structures and regulatory jurisdictions," she said. "This can make it very difficult to implement an orderly resolution of one part of the company without triggering a costly collapse of the entire company."
She acknowledged that many now doubt whether regulators will act in a time of crisis, and said regulators must prove they are serious about ending too big to fail.
"It's easy to be a doubter and simply resign yourself to the idea that it is just too difficult, and that we will never be able to really put an end to too big to fail," Bair said. "If enough of us do that, then the ratings agencies will end up being right in terms of their expectation of future government support. Open-ended state subsidies to large financial companies in times of crisis could become a permanent part of the landscape, with all of the attendant implications that has for risk-taking and the competitive structure in banking."
