WASHINGTON — As the debate on whether and how to regulate investment banks takes shape, Federal Deposit Insurance Corp. Chairman Sheila Bair has called for a receivership program for troubled firms, and implied her agency is best equipped to handle such a task.
In a speech here Wednesday, Ms. Bair also reiterated her belief that investment banks now must operate under a regulatory regime similar to that of commercial banks, claiming that the Federal Reserve Board's intervention in the case of Bear Stearns Cos. has made it "almost impossible to go back" to a market unaware of the extension of the federal safety net — and of the moral hazard that the extension has created.
Her solution: resolutions, not bailouts.
"We need a special receivership process for investment banks that is outside the bankruptcy process, just as it is for commercial banks and thrifts," Ms. Bair said in her speech to the Exchequer Club. "This process must achieve two central goals: First, it should minimize any public loss and impose losses first on shareholders and general creditors. Second, it must allow continuation of any systemically significant operations."
She used the word "agnostic" at least six times to describe the FDIC's position on which agency should be the prudential regulator, but argued a single federal agency should handle receiverships for both commercial and investment banks.
"It would ensure that expertise is at the ready," she said in her speech. "Also, large banks and investment banks have many interrelationships with each other, including counterparty exposures. This again argues for putting all resolution authority in a single agency."
Coupled with her reminder that the FDIC has experience running bridge banks and her observation that the agency has a well-established playbook for resolving commercial banks — while there is none for investment banks — the speech was a marker in an unfolding regulatory debate.
The default assumption to this point has been that a prudential regulator for investment banks would most likely be the Fed, and less likely the Securities and Exchange Commission, but such a structure could still leave some responsibilities to other regulators.
In remarks to reporters after the speech, she indicated the agency's historic authority and experience had conferred particular competence that should be preserved in any future regulatory structure.
"There may be some logic for the FDIC having that receivership role, but on the prudential side, it's probably the SEC or the Fed," she said. "We're agnostic on how this would be structured."
Though she described operating a receivership as a "thankless job," her remarks suggest that assuming such a task is one way by which the FDIC could assure its continued relevance after a regulatory shake-up.
Treasury Secretary Henry Paulson is scheduled to address investment-bank regulation in a speech Thursday; to date Treasury officials have shown little appetite for a formal regulatory regime for investment banks.
While explicitly saying she was not criticizing the Fed, Ms. Bair drew a sharp comparison between the FDIC's experience resolving large-bank failures in the 1980s and the Fed's handling of Bear Stearns. She referred to bridge banks — which allow the receiver to maintain operating functions and sell assets in an orderly dissolution — as a "good model" for investment banks.
The FDIC used its bridge-bank authority to resolve First Republic Bank in Dallas and Bank of New England in Boston "in a way that eliminated shareholders' interests and imposed losses on creditors," she said.
Bear's equity holders were partially compensated and its unsecured creditors were protected.
Ms. Bair also asked whether there should be a fund for investment banks that mirrors the depository insurance fund for commercial banks. An alternative, she said, "might be to provide for special ex-post assessments on all investment banks over a certain size to recoup government losses where support has been provided to a systemically significant investment bank."
Acknowledging the existence of systemic risk necessarily usually implies what Ms. Bair described as a "trade-off between stability and moral hazard," but she argued that ignoring such a risk — and not acting on evidence of it — was not an option.
In other remarks, Ms. Bair said preparation for a large-bank failure — which she is not predicting — requires faster procedures for settling derivatives contracts. Because the agency must decide whether to honor contracts with individual counterparties in a single day, the FDIC is considering a rule that would require banks to maintain information on qualified financial contracts that could be turned over quickly. That rule, she said, might also include record-keeping requirements for derivatives portfolios.