ISTANBUL - The head of the U.S. Federal Deposit Insurance
Corp. said on Sunday that she wanted to end the "too big to fail"
doctrine and shrink the shadow banking system that operates outside the
reach of regulators.
FDIC Chairman Sheila Bair, speaking to the Institute of
International Finance meeting here, said a U.S. proposal to create the
authority to shut down failing systemically important financial firms
may need to be extended to insurers and hedge funds.
"We need to end 'too big to fail' and this needs to be an overarching policy that applies to everyone," Bair said.
Bair said she believed that bank holding companies with
subsidiaries that are shut down by regulators also should be made to
pay the price of failure by being subject to the same wind-down process.
"I believe that the new regime should apply to all bank holding
companies that are more than just shells and their affiliates
regardless or not whether they are considered to be systemic risks,"
she said, adding that including only systemically important firms in
the shut-down regime could reinforce the 'too big to fail' doctrine.
Financial firms subject to systemic risk shutdown authority should
likely also be required to publish "living wills" -- details on how an
orderly wind-down would play out -- on their websites to provide more
clarity to shareholders and customers.
And by applying the resolution authority more broadly outside of
normal regulated bank holding companies, it would help shrink the
shadow banking system by discouraging regulatory arbitrage under which
financial firms shop for the most lenient supervisors.
"If you tighten regulation of the banks even more without dealing
with the shadow sector you could make the problem even worse," she said.
Bair added that reducing the shadow banking system and regulatory
arbitrage is her top priority for the U.S. Congress as it works on
legislation to revamp U.S. financial oversight this fall.
She said there were some problems in extending resolution authority
beyond banks to insurers and hedge funds, which she called a "sea
change" in their oversight. But these could be overcome and it was
appropriate to consider including them in the systemic risk resolution
"If the entity is systemic, that means if the entity gets in trouble it could create problems for the rest of us," she said.
Bair added that the FDIC is talking with the American
Securitization Forum, a financial trade group, and others regarding the
agency securitizing some of the assets that it has taken over from
failed banks in order to help jumpstart U.S. securitization markets.
Additional reporting by Steven Slater in Istanbul, Editing by Ruth Pitchford