“Many More Bank Failures” Expected By FDIC Chairman

Financial Crisis Far From Over

The former head of the FDIC, the late Bill Seidman, had recently predicted that as many as 500 additional banks could fail in 2009.  Now the current head of the FDIC, Sheila Bair, in an interview with Forbes Magazine states that the financial crisis is far from over and that there will be “many more bank failures” ahead.  As previously discussed, the FDIC has been making major preparations to prepare for the closure of numerous additional banks by hiring large amounts of additional staff and securing from the Treasury a line of credit of up to $500 billion to cover unforeseen losses on failed banks.

In a 90 minute interview with Forbes, Ms. Bair made it clear that despite recent improvements in the banking sector, she expected many more bank failures to occur this year.  Ms. Bair also commented on the moves to reform banking regulation and her reservations about the Federal Reserve being given additional regulatory power over banks.  Highlights and comments from the Forbes interview with Sheila Bair follow:

“I think there’s still some challenges, I think we need to be realistic. There are still some troubled assets on the books and we still have an economy that’s under significant stress,” said Bair.

“We still don’t know how deep the recession is going to be,” she said, adding, “we’ll still be well below what we were in the S&L days.”

Still, Bair reminded, 21 insured institutions failed in the first three months of 2009, the most bank failures since 1992. The FDIC’s list of problem banks grew to 305 from 252. Those 305 banks at risk of failure have some $220 billion in assets. The good news: The type of panicked runs that brought down Bear Stearns and Lehman Brothers, where the banks found themselves unable to obtain short-term financing and facing liquidity stress have likely passed.

“Hopefully there are no more events that create liquidity stresses on the banks,” Bair said, knocking on a wooden conference room table, “and now we’re having more good old-fashioned capital insolvencies.”

Ms. Bair expressed major reservations when questioned about the wisdom of giving the Federal Reserve more regulatory power over the banking industry, noting the Fed’s recent failure to curtail the unsound bank lending policies that lead to the biggest banking crisis in our country’s history.

“No other developed country gives their central bank the kind of power we give our central bank,” Bair said.

“[The Fed] had authority to prescribe across-the-board lending standards for mortgages, and a lot of people said they should do that and they just didn’t,” Bair says as an example of where too many roles led to lapses.

Bair instead repeated her support for a council of regulators including the Treasury, the Securities and Exchange Commission and CFTC, bank regulator (Bair says the roles of the Office of Thrift Supervision and Office of Comptroller of the Currency could be combined), the FDIC, the Federal Reserve and perhaps a new consumer regulator for financial products that has been proposed in Congress.

“It was our sense because the taxpayer is going to have significant exposure, the Treasury should have some leadership role,” she said.

Bair says the authority to close institutions of any size would eliminate this “too big to fail” problem. If the mechanism were in place, everyone would know “large financial organizations can and will be resolved,” she says.

Still, Bair said she does not think financial regulatory overhaul will happen anytime soon, as Congress shifts its focus from the financial meltdown to the Obama administration’s health care agenda. “If that’s the case, I don’t know if that’s necessarily bad,” she said.

“I know some will say you have to act quickly while the window’s there,” Bair said. “Well, yes and no … I think there may be some merits to taking some time, taking a deep breath and thinking about it carefully. I don’t know if it would be a terrible thing if more dramatic regulatory restructuring did not occur this year.”

Ms. Bair seems to be taking a measured and intelligent approach to banking reform.  All too often a crisis results in hasty legislative action that causes more harm than good.   As Ms. Bair noted, regulatory powers previously in effect could have prevented the banking crisis if the Federal Reserve had used their authority to prevent lending abuses.  Why would giving the Federal Reserve even more control over the banking industry prevent a future financial crisis?

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