WASHINGTON — Though she has appeared neutral on the subject in the past, Federal Deposit Insurance Corp. Chairman Sheila Bair pointedly argued Monday that her agency should gain the power to step in when any systemically important company gets into trouble.
Appearing at the Economic Club of New York, Bair said the FDIC has more expertise and experience than any current or future agency at cleaning up gigantic nonbanks, and even offered hints on how she might do it.
"The FDIC is up to the task, and whether alone or in conjunction with other agencies, the FDIC is central to the solution," she said.
In wide-ranging remarks, Bair also said the Treasury Department has enough resources to recapitalize the largest banks in the aftermath of the stress tests and denied that a move to increase her agency's borrowing authority is an end run around seeking more congressional funds for the Troubled Asset Relief Program.
"The tools are there without additional Tarp capital being made available," she said.
"For now, we have the resources that we need," Bair said. "Given the structure that we have, I think we can work through it with available resources."
She also acknowledged she initially opposed the agency's program that has guaranteed $336 billion in senior unsecured debt issued by banks and their holding companies.
"Frankly, it was never something I wanted to do," she said. "I've always been uncomfortable with it."
But Bair called it a "successful program" and said the fees the agency is charging are having their intended effect: weaning banks off of what was designed as temporary coverage.
"There has been a slowdown already in issuance. I think there's some indication that making it more expensive works," she said. "My … intention is we get out of it by the end of October."
Bair also downplayed concerns that the agency faces a huge funding risk as it gets set to manage financing of the Legacy Loans Program, which is a piece of the Obama administration's plan to unload bad assets from banks' balance sheets.
Even though the plan calls for the FDIC to guarantee as much as $6 in debt for every $1 in capital used to purchase toxic loans, Bair suggested the guarantee — which would require firms to pay a fee — is less risky than standard deposit-insurance coverage. She also indicated that a higher credit line with the Treasury proposed in legislation — that would raise the borrowing authority from $30 billion to $100 billion, and to $500 billion in extreme cases — is not envisioned as providing any help to the LLP.
"It's all about protecting depositors — that's the reason this has been requested. It's not tied to the Legacy Loans Program," she said.
Of the 6-to-1 maximum leverage in the LLP, Bair said: "Even though it sounds like a lot, typical bank balance sheets are leveraged at 10 or 12 to 1. We insure those deposits on an unsecured basis. In terms of the risk that we take … it's really not that eye-popping. Leverage, responsibly used, can be an important tool."
But most of her remarks centered on why new resolution powers were needed, and why the FDIC is the right agency to wield them. The Treasury Department has proposed handing such powers to the FDIC, but the American Bankers Association has objected, claiming the agency lacks the expertise to handle large nonbanks and that the expanded workload could hurt its deposit insurance brand.
But Bair rejected those criticisms.
"No other agency has the skills and tools needed for resolving these institutions," Bair said. "The knowledge and skills used to resolve smaller institutions can be applied to larger ones. In addition, we can and would reach out to the private sector for experienced bank management to help us unwind and resolve larger entities."
Though Bair has always appeared willing for the FDIC to take a larger role in resolving systemically important institutions, she has never openly sought such power before now. It was also clear she had already begun thinking about how new abilities could be put to use.
Bair suggested the agency — if Congress authorizes the new powers — could resolve systemically risky nonbanks similar to a "good-bank/bad bank" model, which was used for some thrifts during the savings and loan crisis. A firm's "good" activities would be preserved in a bridge institution and its weakest parts would stay in the "bad" institution and ultimately sold. Creditors and shareholders would face losses.
"The cost of the bad bank would be partially paid for by the losses imposed on the stockholders and unsecured creditors," she said. "Any additional costs would be borne by assessments on other systemically risky firms. This has the benefit of quickly recognizing the losses in the firm and beginning the process of cleaning up the mess."
The new powers would enable the FDIC to resolve banks and holding companies on a consolidated basis, Bair said, adding that the current system — in which holding companies must declare bankruptcy — proves a challenge to the agency.
"In some cases, the insured depository may be so dependent on its holding company that it is difficult, if not impossible, to operate without holding company cooperation," she said. "This can hamstring the FDIC and our ability to preserve the bank's franchise value, and minimize losses to the deposit insurance fund, which is our No. 1 mandate."
She argued a new stand-alone agency would be counterproductive, since failures of large firms tend to be cyclical, and a new entity would need to try to adjust its resources to the environment.
It "is difficult to imagine the duties of the stand-alone resolution authority in the interim," she said. "When crisis does strike, the authority would likely be understaffed and unprepared, because we all know too well how hard it is to see the brewing storm. This would make it less likely that authorities would be able to act quickly, creating the kind of public panic a new independent authority was supposed to prevent."
As banking firms begin repaying capital received under the Troubled Asset Relief Program, Bair indicated that is not a decision they should be able to make alone. She said companies often need more capital than they are willing to admit.
"Bank holding companies and banks can sometimes have perhaps rosier views of the strength of their capital position than others might. The reason the Tarp capital was put in there to begin with was … not just to keep them afloat, but to keep them in a strong enough position to lend, because that's what we really need now," Bair said.