WASHINGTON — To avoid undercutting the Federal Deposit Insurance Corp.'s brand, the agency should consider creating a separate arm to resolve systemically risky nonbanks, Chairman Sheila Bair said Wednesday.
Speaking at an American Bankers Association conference, Bair also said she is trying to dramatically reduce a planned assessment of the industry, and warned that creating a systemic risk regulator would not by itself stop firms from becoming "too big to fail."
Bair said that if Congress gave the FDIC resolution powers over systemically important banks, a new body, supervised by the agency's board but operating on its own, would avoid diluting the FDIC's brand, which is most associated with the backing of deposits.
"If Congress did give" the FDIC that authority, "we should consider perhaps a separate unit, under the FDIC board but separately branded and named, to deal with the nonbank institutions," she said.
The establishment of a new institution under the FDIC's control has a recent precedent. When Congress created the Resolution Trust Corp. in 1989 to resolve failed thrifts, it put the FDIC in charge of managing the new organization, and the RTC borrowed most of its initial staff from the FDIC work force.
Bair did not appear to favor the creation of a new independent agency to handle nonbank resolutions. She said the FDIC had "the experience and manpower to handle the task of taking over a large nonbank institution."
"To create another agency that would have to be staffed up and ready to be a resolution entity for nonbank institutions — I'm not sure that makes much sense," she said.
The Treasury Department proposed last week that the FDIC get resolution powers over large firms like American International Group Inc. House Financial Services Committee Chairman Barney Frank is expected to introduce his bill on the subject soon.
During her speech, Bair signaled that banks and thrifts may pay much less than the 20-basis-point special assessment the FDIC proposed to fortify the Deposit Insurance Fund.
FDIC officials had said earlier that the assessment could be cut in half if Congress passed a bill more than tripling the agency's borrowing authority, to $100 billion. But Bair indicated Wednesday a bigger cut may be in the offing. Also mitigating the fee would be revenue as the FDIC adds fees from its temporary guarantee of unsecured debt into the Deposit Insurance Fund.
"I'm hoping we can get that special assessment down to single digits," Bair said. She said she believed Congress would finish legislation raising the line of credit shortly after lawmakers return from their Easter recess.
"If Congress increases our borrowing authority and we get some additional revenue from the surcharges on the" temporary debt coverage program, "I'm hoping we can reduce that special assessment significantly."
The industry has until today to comment on the special assessment, proposed in late February as an interim rule, and Bair said she does not expect the board to finalize the one-time premium before late May. (The assessment will be charged on second-quarter domestic deposits, but it will be collected in the third quarter.)
In her prepared remarks, Bair said that to rein in large, systemically important firms, policymakers need to do more than just tighten supervision of such companies.
A new systemic risk regulator is "no panacea. We need to simply end 'too big to fail,' " she said. "A strong case can be made that … just being bigger isn't necessarily better. I don't mean to imply that there are no well-managed big banks. That's certainly not true. But when you have a handful of giants … you're making a huge bet that a few banks and their regulator over a long period will always make the right decisions at the right time."
She said regulators should "create regulatory and economic disincentives aimed at limiting the size and number of systemically important financial firms," which she said could include higher capital requirements for those firms.
"Instead of hoping that these risks will be competently managed by a systemic risk regulator, I think we also need a fail-safe system where if any one large institutions fails, the system carries on without breaking down," she said.
In a subsequent speech to the ABA, Lawrence Summers, the head of the National Economic Council, said banks have a pivotal role in the economic recovery, and pledged that the Obama administration does not intend to penalize an entire industry.
"One cannot speak of the banking industry as monolith," Summers said. "The vast majority have carefully, prudently and responsibly met their obligations to their communities and to their owners, and are deserving of support and approval as they continue to carry on that function that is so central for economic recovery. That is not something that can be said of all institutions or of all aspects of the behavior of some institutions."
Summers said that "where there are problems, they need to be addressed decisively, responsibly and with proper accountability."
"Those efforts at proper accountability must keep in mind what is a central imperative in all of this — the driving of economic recovery in the United States," he said. "We must also not govern out of anger, and must instead keep our eye on the North Star of economic recovery. That is the approach that will be followed in the months to come."