ORLANDO, Fla. — The Senate Banking Committee is altering a provision in a proposed financial regulation bill that would have allowed the Federal Reserve to lend to individual payment and clearing firms in times of financial stress after concerns were raised by FDIC Chairman Shelia Bair.
A Senate Banking Committee spokeswoman said its staff plans to remove language allowing the Fed to use its emergency authority to lend to an individual "financial market utility." Only payment and clearing firms deemed "systemically important" by a proposed oversight council of regulators would have been eligible.
The move came Bair balked at the idea. Speaking to a conference of bankers in Florida, Bair warned that the provision could have allowed for future bailouts of certain firms.
"We do have serious concerns about other sections of the Senate draft which seem to allow the potential for backdoor bailouts," she said.
Bair suggested that any future government lending programs should have to meet a "very high bar" before being put in place because of the risk of the government picking winners or losers. A "systemic risk" finding by a proposed regulatory oversight council might be appropriate before any emergency programs are put in place, she said.
Banking panel spokeswoman Kirstin Brost said the committee had informed Bair's staff Thursday evening that it planned to strike the provision from the legislation introduced by Sen. Christopher Dodd (D., Conn.) on Monday. The Banking panel on Monday will begin considering amendments to the bill.
Bair, informed of the removal shortly after her speech, said she was pleased by the decision. On the broader regulatory overhaul effort, however, she said she was concerned that issues that have previously appeared settled keep getting reopened. She noted a push by some industry groups to get lawmakers to reconsider whether the FDIC is the best agency to wind down large, failing financial institutions.
"At the end of the day, some people may not want anything so they keep reopening up stuff. Maybe that's the strategy or maybe they're afraid of us," Bair said in an interview.
Speaking to an audience of mostly bankers from small and midsize banks, Bair took aim at their larger competitors. Big banks need to "understand that they sink or swim on their own," she said while lauding the efforts of community banks.
"While so many big banks keep pulling back, you are hanging in there, doing your best to support the credit needs of our struggling economy," she said.
Bair also said the FDIC is reviewing a number of policies that could benefit smaller banks, including an extension of its guarantee program for transaction accounts. The current economic conditions warrant consideration of an extension of the program, which more than 6,900 banks have chosen to be part of, she said.
"There is still a threat that the credit challenges facing community banks could lead to renewed liquidity problems if uninsured deposits once again flow to the largest banking organizations," Bair said. "This in turn could trigger liquidity failures, imposing additional costs on the deposit insurance fund."