WASHINGTON — FDIC Chairman Sheila Bair last week added her endorsement to a proposal that would require secured creditors to help pay for the costs of bank failures that are deemed large enough to threaten the larger financial system.
Bair has sent a letter to Congress indicating she supports the proposal, which was added recently to the regulatory overhaul legislation currently before the House Financial Services Committee. That proposal would require secured creditors, such as repurchase agreement lenders and the Federal Home Loan Bank system, to bear losses of as much as 20% to cover the costs of a systemically significant bank failure.
Such lenders currently require banks to post collateral equal to the amount of funding they receive. If a bank is unable to repay, the collateral changes hands and is not available to other creditors or to repay losses borne by government insurance funds, according to a report by American Banker, an affiliate of Credit Union Journal.
"This amendment will help achieve your goal of enhancing market discipline because it will mean that secured creditors, alike with every other creditor, will need to evaluate the solvency of our largest financial firms," Bair said in a Nov. 18 letter to House Financial Services Committee Chairman Barney Frank.
