Wednesday, April 1, 2009

WASHINGTON (AP) - The head of the Federal Deposit Insurance Corp. said Wednesday new supervision that prevents big financial institutions from threatening the overall economy should include raising their capital requirements.

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. 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, adding that 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 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 creation of 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 failed big companies _ as well as higher capital requirements for high-risk institutions should be part of the new system, she said.

Also drawing the distinction between large, complex financial institutions and smaller banks, National Economic Council Chairman Larry Summers told the bankers, “one cannot paint all institutions with the same brush.”

Summers stressed the importance of President Barack Obama’s massive economic stimulus plan in spurring economic recovery. “We cannot have a completely healthy financial system in a profoundly unhealthy economy,” he 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 in London, where they will jointly call for governments to focus on tighter regulation of financial markets as opposed to more economic stimulus measures. (PROFILE (CO:AMERICAN INTERNATIONAL GROUP, INC.;) (CO:CITIGROUP INC.; TS:C; IG:E55AE0105CB337448557CECA13D587AC;) (CO:BANK OF AMERICA; TS:BARCO;) (CO:BANK OF AMERICA CORPORATION; TS:BAC; IG:E55AE0105CB337448557CECA13D587AC;) (COUNTRY:United States; APGROUP:North America;) )

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