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FDIC Chief Sees 'Backdoor Bailouts' in Senate Bill

Karey Wutkowski

Federal Deposit Insurance Corporation Chairman Sheila Bair speaks at the American Banking Association Government Relations Summit event in Washington, March 18, 2010. (REUTERS/Larry Downing)

ORLANDO, Fla. - U.S. bank regulator Sheila Bair said she has "serious concerns" that the Senate's regulatory reform bill allows for backdoor bailouts of the largest financial firms.

Bair, speaking to a community bankers conference on Friday, said the draft bill seems to allow such rescues through the Federal Reserve's emergency lending facility, known as its 13(3) authority.

"We will work closely with the Senate to make sure there are no loopholes around the carefully crafted resolution procedures," said Bair, chairman of the Federal Deposit Insurance Corp.

"If the Congress accomplishes anything this year, it should be to clearly and completely end 'too big to fail,'" she said in prepared remarks before the Independent Community Bankers of America.

Bair, a critic of some of the government's massive rescues of Wall Street firms, has been one of the strongest advocates of creating a "resolution mechanism" that would allow the government to dismantle a failing financial firm.

The lack of a resolution mechanism prompted the government to engineer multibillion-dollar rescue packages for insurer American International Group Inc (AIG.N) and Citigroup Inc (C.N) during the financial crisis.

Under House and Senate bills moving through Congress, the FDIC would gain the power to dismantle a large financial firm if it was deemed insolvent.

The Senate Banking Committee, chaired by Democrat Christopher Dodd, is scheduled to begin debating and amending its financial reform bill on Monday. The resolution mechanism proposal could be altered.

In her remarks, Bair did not clarify how she would like the proposal to be changed.


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"We do have serious concerns about other sections of the Senate draft which seem to allow the potential for backdoor bailouts through the Federal Reserve Board's 13(3) authority," she said.

The Senate bill, which Dodd unveiled earlier this week, changes the Fed's emergency lending authority to prevent it from propping up individual institutions.

However, it still allows the Fed to extend "systemwide support for healthy institutions or systemically important market utilities with sufficient collateral to protect taxpayers from loss during a major destabilizing event."

Bair praised community bankers for the role they play in extending credit to borrowers and for maintaining relationships with those borrowers.

Bair, a Kansas native who once worked as a bank teller herself, said large banks have pulled back on credit more than smaller institutions, and this is hampering the economic recovery.

Last year, banks' loan balances fell by 7.5 percent, the steepest decline since 1942.

Bair noted that the largest banks accounted for more than 90 percent of the total drop in bank lending in the 2009 fourth quarter. Small banks, on the other hand, increased their loans by more than 0.5 percent, she said.

(Reporting by Karey Wutkowski; editing by John Wallace)

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