Bair: Expand Reform to Nonbanks

Federal Deposit Insurance Corp. Chairman Sheila Bair said past regulatory policies helped encourage arbitrage by institutions, which in turn contributed to the recent crisis.

Bair, speaking Monday to a business economists' group, said reforms enacted after the thrift crisis of the 1980s led to safer practices in the banking industry, including higher capital levels. But those reforms erred, she said, by excluding nonbanks and creating "incentives for financial services to grow outside of the regulated sector, in the so-called shadow banking system."