WASHINGTON — Federal Deposit Insurance Corp. Chairman Sheila Bair spent one of her last congressional hearings trying to convince skeptical Republicans that "too big to fail" has finally been eliminated.
During the hearing, Bair fielded questions on a multitude of topics, including overzealous examiners and the impact if Congress did not extend the U.S. debt ceiling. But she spent most of her time defending the Dodd-Frank Act's new resolution system for systemically important institutions.
"I want to prove to you that it can work," Bair told members of the Financial Services subcommittee on financial institutions.
Republicans questioned whether the new system was any better than the bankruptcy process and whether the FDIC was up to the job.
"I still have reservations about this resolution authority and would have preferred to see a different form of resolution where there is absolutely no taxpayer exposure," said Rep. Shelley Moore Capito, W.Va., who chairs the subcommittee.
Rep. Francisco Canseco, R-Texas, alluding to a recent FDIC report on how the agency would have resolved Lehman Brothers under the regime, said the FDIC is more experienced at handling much smaller institutions.
"A closer examination begs the question of just how ready the FDIC is to handle its new responsibilities," Canseco said. "Lehman Brothers had $639 billion in assets when it failed. This was the largest bankruptcy in American history. … What makes the FDIC think it has the resources to wind down such a large institution?"
Bair, who is leaving the agency in just over a month, gave no ground during the hearing.
She noted that the FDIC cleaned up the largest bank failure of all time — that of the $300 billion-asset Washington Mutual — and that it participated in providing aid packages to the largest banks.
"We insure these banks. We understand them," she said. "I would match the experience of my staff … against anybody at the Fed, the OCC or the Treasury. We have very smart people who do this for a living."
Many lawmakers were not persuaded that the government would use the new powers as designed. The law allows the Treasury Department to appoint the FDIC as receiver for systemically important firms in special cases when a bankruptcy may cause economic shock waves.
Rep. Ed Royce, R-Calif., said the market clearly still perceives that "too big to fail" exists, noting that large banks receive cheaper funding than small ones.
"At the end of the day it's a system that enables the use of the government funds in resolving an institution," Royce said.
Bair said that, under the new system, which parallels failed-bank receiverships, the only creditors getting extra support at a failed firm are those vital to keeping it operating until its assets were sold. The law also allows forced structural changes at companies lacking sufficient living wills, plans that companies must develop to detail how they would be dismantled in a crisis.
"We clearly have a job ahead of us in terms of educating people about our process, and ensuring them that it is just as harsh as bankruptcy," Bair said.
Though she acknowledged that lawmakers are loath to pass bank bailouts again, Bair said the new regime will make it easier for them to reject any such proposal in the future.
"I know you don't want to do it," but "the tools are there to require credible resolution plans, the tools are there to require downsizing," she said.
She added that, as with situations where a bank is near failure, the greater likelihood of the government stepping in could force a nonbank to think seriously about its options, including a merger.
Troubled banks are "very motivated," she said. "That would be an important factor that we did not have during the crisis."
Bair also had her own message to Congress: raise the debt ceiling.
With the U.S. already technically over the debt limit, Bair said a failure to raise the ceiling would be "calamitous" for the financial system.
"Investor confidence in U.S. Treasury obligations is absolutely vital to domestic and global financial stability and cannot be taken for granted," she said in her testimony.
Lawmakers from both parties, meanwhile, continued to push Bair on exams, arguing the FDIC was being too tough on institutions.
"The one common theme I hear from community banks across my district is that they feel hamstrung by regulators in their ability to lend," Capito said.
Rep. David Scott, D-Ga., said community banks in his state feel the FDIC wants them to stop renewing performing loans as a result of orders requiring reductions in real estate concentrations.
"Surely, there is a better way to enforce FDIC rules and regulations so they don't hurt" consumers and banks, Scott said.
Bair suggested the lawmaker may not have had accurate information. In similar exchanges, she asked committee members for specific examples of the institutions lodging complaints. She also offered to meet with bankers during a coming trip to Atlanta to address such issues.
"I think our policies are not consistent with what you are being told," Bair told Scott. "If the loan is performing, if you have a creditworthy borrower who is making payments on that loan, it doesn't matter what the collateral is. … If you're refinancing that loan, and you've got a creditworthy borrower who continues to make payments, you don't have to write down that loan."
Bair also faced questions over coordination between safety and soundness oversight and consumer-focused regulation. Not only has the FDIC created a new consumer division to manage enforcement of rules created by the new Consumer Financial Protection Bureau, but the CFPB now holds an FDIC board seat under Dodd-Frank, giving it a role in handling safety and soundness issues as well.
Some lawmakers said having the CFPB on the FDIC board could be a conflict of interest.
"I believe we need to focus on safety and soundness and get any … conflict of interest out of the way," said Rep. Jim Renacci, R-Ohio.
Bair said the FDIC sees no issue with having the consumer bureau on its board. "We're fine with it," she said. In her prepared testimony, Bair reiterated the agency's "long-standing belief that consumer protection and safe and sound banking are two sides of the same coin."
Bair also distanced herself from congressional Republicans who favor the CFPB being run by a commission, rather than the structure mandated by Dodd-Frank of a single director overseeing the bureau. The FDIC had supported the commission idea at one point, but Bair now says she does not see an issue with the current framework.
"Early on, when Congress was considering this, we were sympathetic to a board approach," Bair said, noting that the FDIC board provides useful checks on her own authority. "Even though it's more difficult for me, I'm no dictator. I have to get my five votes."
But, she added, "the OCC has a single head, so you have both models in the financial regulatory sphere. So, no, I wouldn't say I have reservations" about the CFPB model.
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