Federal Deposit Insurance Corp. Chairman Sheila Bair on Friday said the financial regulatory reform measure in the Senate will bring an end to "too big to fail," and she defended the measure's $50 billion resolution fund, which would be paid for by large banks themselves.
"This a process the FDIC has long used for banks. It is a process smaller financial institutions have to deal with," she said on CNBC. "We think larger institutions should have to deal with the same kind of robust process that imposes the losses on their shareholders."
Bankruptcy for larger financial firms does not work, Bair added.
"The entire market seized up after the Lehman Brothers bankruptcy," she said. "Bankruptcy is a process that's abrupt, it immediately disrupts credit flows provided by a large financial intermediary, it immediately gives rights to derivatives counterparties to pull collateral out of a failing institution, which creates a lot of liquidity distress and disruption."
Bair said the bill would also curb the speculative abuse of derivatives, but she warned about the unintended consequences of moving derivatives operations into a less-regulated area.
"We would not want to see capital being released, being held against that type of high-risk activity, because that would be moved into a less-regulated venue," she said.
Bair also said she supported the creation of a consumer protection agency. The Senate bill would create an independent agency, but it would house it at the Federal Reserve.
The chairman said both banks and credit flows are improving. She said she believes bank failures in the U.S. have yet to reach their peak, but will by the end of the year.
The FDIC has sufficient cash in its insurance deposit fund to handle the failures, which will occur among smaller and regional banks, she added.