Federal Deposit Insurance Corp. Chairman Sheila Bair said the government should consider limiting payments to secured creditors of failed holding companies.

Speaking in Turkey, Bair said that if the government wins resolution powers of bank holding companies, a key part of regulatory reform, it could impose 80% haircuts on secured creditors when it winds down a large firm. Doing so would likely lead to better risk monitoring of financial firms and larger payments to unsecured creditors.

"By totally protecting secured claims … the current priority scheme may encourage greater fragility in the financial markets," Bair said at a meeting of the International Institute of Finance in Istanbul. "A resolution mechanism that discourages this result by potentially haircutting these claims could help reduce dependence on short-term funding and increase firm, and system, resiliency."

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