Updated rules to govern banking after the financial crisis are creating complexity and encouraging lenders to contemplate bailouts, according to Sheila Bair, former chairman of the Federal Deposit Insurance Corp.

"The rules themselves are making the industry more complex, not less," said Bair, who led the regulator from 2006 to 2011. "The stress tests are really overtaking, they're dominating the mindset and focus of bank boards and their executives, as well as the supervisors."

Bair spoke at "Bretton Woods 2014: The Founders and the Future," a conference in New Hampshire hosted by the Center for Financial Stability. It's the same hotel where representatives from around the world met in 1944 to reshape the financial system.

Bair, a senior adviser at Pew Charitable Trusts, oversaw the implementation of the Dodd-Frank Act, which bestowed greater powers on the regulator to wind down complex lenders after Lehman Brothers Holdings Inc.'s collapse in 2008. Amid moves to address the dangers posed to the banking system by the failure of large institutions, regulators should steer clear of trying to compensate for a perceived lack of market discipline and instead reinforce it, Bair said.

"I do fear we may be slowly transitioning back into a bailout mentality," Bair said.

Bailout Prospects

A "mini-campaign" to repeal the parts of Dodd-Frank that ban bailouts for putting too many constraints on the Federal Reserve is a concern, Bair said, adding that there's already a lot of flexibility in the law.

Almost 7,000 banks operate in the U.S., with the six largest managing $10 trillion in assets, according to data from the FDIC and Fed.

Under Dodd-Frank, large banks are required to draw up so- called living wills, which detail how they could go bust without hurting the wider market. The Fed and the FDIC informed 11 of these lenders — including JPMorgan Chase & Co. and Goldman Sachs Group Inc. — last month that their bankruptcy plans were inadequate.

"There needs to be more clarity about the living-will process so the markets can see here's the game plan," Bair said.

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