- The Washington Times - Wednesday, April 1, 2009

WASHINGTON (AP) - The head of the Federal Deposit Insurance Corp. says new oversight of big financial institutions deemed to be high risk should include raising their capital requirements to help protect the financial system.

FDIC Chairman Sheila Bair’s comment that some big banks and other financial institutions should be mandated to hold more capital as a buffer against risk in times of stress brought vigorous applause from an audience of bankers Wednesday. Many were executives from smaller, community banks.

Bair is calling for a new system of regulation that prevents institutions from taking on excessive risk and becoming so big their failure would endanger the financial system.

“We simply need to end ‘too big to fail,’” Bair told the gathering of the American Bankers Association. Echoed Wayne Abernathy, an executive vice president of the organization: “We want to put a stake through the heart of it.”

Bair said she sees “some glimmers of hope” in the lending pipeline beginning to thaw, though credit is still tight and “there is still more pain to go.”

“If you’re looking for a quick fix, we’re not going to get it,” Bair said.

What is needed to replace the “too big to fail” model is a “fail-safe system” that will limit the dangerous size and concentration in high-risk activities of banks and other financial institutions, she said.

Policymakers are trying to craft a new financial rule book to replace the “too big to fail” stamp put on federal policy in the financial crisis, as the government rushed in to rescue insurance giant American International Group Inc., and pumped tens of billions of dollars into Citigroup Inc. and Bank of America Corp.

The Obama administration last week presented to Congress an extensive overhaul of financial regulation meant to prevent a repeat of the banking crisis that toppled iconic institutions and wiped out trillions of dollars in investor wealth. A pillar of the plan is creating a so-called systemic regulator to monitor against the risks that plunged markets worldwide into distress last year.

Bair has maintained that a mechanism is needed to resolve troubled financial institutions similar to what the FDIC does with federally insured banks and thrifts.

Such a special receivership process _ replacing “very messy” bankruptcies for large failed companies _ as well as higher capital requirements for high-risk institutions should be part of the new system, she said.

A Federal Reserve official, speaking Wednesday at an Ohio bankers’ conference in Columbus, proposed a layered regulatory framework that would subject financial institutions to varying degrees of oversight based on the level of risk they pose to the system.

Sandra Pianalto, president of the Federal Reserve Bank of Cleveland, said the institutions could be ranked as non-complex, moderately complex or systemically important. Like Bair, she suggested financial institutions deemed systemically critical should be held to higher capital requirements than smaller banks.

National Economic Council Chairman Larry Summers, who addressed the bankers’ gathering in Washington after Bair, also drew the distinction between large, complex financial institutions and smaller banks. “One cannot paint all institutions with the same brush,” he told the bankers, while stressing the importance of President Barack Obama’s massive economic stimulus plan.

“We cannot have a completely healthy financial system in a profoundly unhealthy economy,” Summers said.

In Europe, meanwhile, the leaders of France and Germany prepared to create a united front ahead of the G-20 summit of global leaders Thursday in London, where they will jointly call for governments to focus on tighter regulation of financial markets as opposed to more economic stimulus measures.

While the French and German leaders focused on revamping regulation, Obama and British Prime Minister Gordon Brown spoke in their joint press conference about how to jolt the world out of recession with stimulus programs.

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Associated Press writer Meghan Barr in Columbus contributed to this report.

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