The former Chair of the Federal Deposit Insurance Corp. Tuesday said she is concerned that the current push to deregulate banks could lead to a calamity in the financial system down the road.
Bair, speaking before the Brookings Institution Tuesday, expressed concern with what she sees as reactive policy overcorrections under both Democratic and Republican administrations.
"We had [the Great financial] crisis, arguably the pendulum swung too far in favor of regulation," Bair said. "But now we're seeing the pendulum go the other way … so I just fear that we're going to go too far the other way now and [that will] lead to another crisis, and back it goes."
Bair, a Republican who was nominated to chair the FDIC by then-President George W. Bush, criticized the pace of regulation following the financial crisis, saying it is "embarassing" that reforms like the Basel III endgame capital standards have been unfinished for nearly two decades.
"Most of that response to the 2008 financial crisis — that should have been put to bed a long time ago," Bair said.
Bair also noted that deregulatory periods have occurred across administrations of various parties, citing both the Clinton and Bush eras as periods in which the pendulum swung towards lighter-touch regulatory approaches. In many cases, she noted, these trends overcorrect for what came before them, noting the deregulation of derivatives and the weakening of bank capital standards set the stage for the 2008 crisis.
Bair also pushed back on the idea that Dodd-Frank was a relic of a bygone era. Bank industry allies — including Rep. Andy Barr, R-Ky., who serves as chair of the House Financial Services Committee's financial institutions panel — have criticized Dodd-Frank as a blunt and onerous tool that did not adequately tailor regulation to bank size. Federal Reserve Vice Chair for Supervision Michelle Bowman
"Regulation … should be forward looking, it should be dynamic, it should be responsive to the issues that we see today — but so many of those issues are … exactly the same issues that we confronted in 2008, like excessive bank leverage, like risk-based rules that create distorted incentives about where you're going to allocate your capital," she said. "These are just issues … that are creating instability in our financial system, and people need to remember what happened in 2008, or need to remember those lessons in crafting any kind of a future regime."
The concept of agency independence was another theme throughout Bair's remarks at the Brookings event. An executive order by President Trump in February wrested some control away from independent agencies like the FDIC by compelling the agency to submit draft rulemakings to the White House's Office of Management and Budget for review.
When asked what worries her most about the loss of supervisory independence, Bair said she believes the current approach will have a chilling effect on supervision.
"I think it will make the examiners timid," she said. "[Examiners are] highly sensitive to the tone at the top … because they will read whatever the statement you made and they'll take it maybe farther than you want to go."
During her time at the FDIC, Bair recounted incidents where the White House had made its policy preferences known, leaving FDIC staff uncomfortable wielding their power in a way that is contrary to those preferences because they weren't sure whether the administration had their back.
"I think robbing the independence of [agency] leadership and ability to speak with authority — 'These are my policies, this is what we're going to do, at least during my tenure,'" she said. "Taking even that away, you're going to have a lot of scared, timid examiners."
The FDIC's unresolved sexual harassment and workplace cultural issues also worried Bair. The FDIC faces festering workplace culture issues and staff attrition that threatens its ability to fulfill its regulatory responsibilities, according to a March
Bair said focusing on staff morale is crucial, because, "demoralized agencies don't perform." Noting the FDIC used to be ranked a top agency for staff satisfaction, she says the issue needs to be addressed for FDIC to function properly.
Bair also expressed dismay that the current administration had, in her view, not prioritized addressing the workplace issues at the agency, despite some of the same leadership having raised the issue in the last administration. Acting Chair Travis Hill — previously the agency's vice chair — was
"I think there were real issues, but I also think it was a political cudgel that seems to have now gone away, because we have people with different political affiliations in leadership positions," she said. "And it just isn't getting priority after making a big issue of it, now that they're in control … and I'm a Republican, it just doesn't seem like a priority anymore, and that does upset me a lot."
