Bair: Dodd Bill May Allow for 'Backdoor Bailouts'

ORLANDO, Fla. — Policy makers need to end the concept of "too big to fail," including revising Senate legislation unveiled this week that could still allow for industrywide rescues, FDIC Chairwoman Sheil Bair said Friday.

Bair told a conference of community bankers that her agency supports efforts to prevent government assistance to individual institutions, as both the House and Senate have considered. Still, she said legislation released this week by Sen. Christopher Dodd (D., Conn.) contains loopholes that need to be fixed.

"We do have serious concerns about other sections of the Senate draft which seem to allow the potential for backdoor bailouts through the Federal Reserve Board's" emergency authority, she said.

Specifically, Bair said provisions potentially allowing the Fed to provide emergency lending to firms that provide payment and clearing services. Any industrywide lending facilities provided by the Fed in times of stress should meet a "very high bar," she said, suggesting a "systemic risk" finding by a proposed oversight council might be appropriate before any emergency programs are put in place.

A spokeswoman for Dodd said the issue had already been changed in the legislation.

"We informed Chairman Bair's office last night that the provision she is concerned about will be removed in the manager's amendment," spokeswoman Kirstin Brost said.

Speaking to an audience of mostly bankers from small and midsize banks, Bair took aim at their larger competitors. Big banks need to "understand that they sink or swim on their own," she said while lauding the efforts of community banks.

"While so many big banks keep pulling back, you are hanging in there, doing your best to support the credit needs of our struggling economy," she said.

Bair also said the FDIC is reviewing a number of policies that could benefit smaller banks, including an extension of its guarantee program for transaction accounts. The current economic conditions warrant consideration of an extension of the program, which more than 6,900 banks have chosen to be part of, she said.

"There is still a threat that the credit challenges facing community banks could lead to renewed liquidity problems if uninsured deposits once again flow to the largest banking organizations," Bair said. "This in turn could trigger liquidity failures, imposing additional costs on the deposit insurance fund."

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