Will The FDIC Be Super-Regulator?

In a speech to the Economic Club of New York yesterday, the Federal Deposit Insurance Corp. (FDIC) Chairman Sheila Bair suggested that her agency was best suited to handle broad new powers being considered by the government to seize and restructure impaired, systemically important financial institutions before they threaten the broader system.

Government bailouts of companies like AIG (AIG), Citigroup (C), Bank of America (BAC) and others involving billions of taxpayer dollars have brought into focus the need to better handle the problem of “too big to fail” financial institutions. Regulatory reforms currently being considered include close supervisory oversight of risk-taking, risk management and the financial condition of such institutions.

Regarding the mechanism for resolution, Ms. Bair suggested the “good bank-bad bank model,” where viable parts can be placed into the “good bank” using a structure similar to the FDIC’s bridge bank, and the nonviable parts can be placed in a “bad bank” until they can be unwound or sold.

She stated that there is no need for another government agency to run the resolution program since the FDIC already has many years of experience resolving banks and closing them.

While the policy-makers are still debating whether such authority should go to the Federal Reserve or the FDIC or to a new stand-alone agency, this was the first time Ms Bair has explicitly stated that FDIC is best equipped to do the job.

We are not sure whether the Federal Reserve or the FDIC is better suited for this job, but there is a need to move ahead as soon as possible on the broader legislation for the “Systemic Risk Regulator” or a “Super Regulator” for the financial system. This could — in addition to being the resolution authority for the “too big to fail” financial companies — coordinate amongst the various regulatory authorities supervising the various components of the financial system, and also look at the big picture of risk.

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Comment by Kiwi

2009-04-28 23:34:46

To sieze and slash without a fair hearing first, is like Quantanamo for business. Might as well dump the constitution if you are going to ignore it. Banning the class of toxic instrument would be more like it.
You dont swat flies with a sledgehammer.

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