Ending the idea that large financial institutions are “too big to fail” is a top priority under the Obama administration’s regulatory reform proposal, said Sheila Bair, chairman of the Federal Deposit Insurance Corp.
“Clearly, there has been moral hazard and lack of market discipline fed by the 'too big to fail' doctrine, and this in turn has been fed by the lack of resolution mechanism that really works for very large financial organizations and this has been a central focus of ours,” Bair said in an interview on CNBC.
President Barack Obama's sweeping plan to reform financial regulation, which was unveiled on Wednesday, included a proposal to make the FDIC the resolution authority responsible for unwinding troubled financial firms.
“[Obama’s regulation is] a good opening to the process,” said Bair. “I commend the President for getting personally involved in this and taking leadership and putting his own considerable influence behind the efforts…We’re still analyzing the whitepaper and want to work with the administration and Congress constructively on this.”
She said the FDIC has played a substantial role in stabilizing the financial system and would like a seat at the table in oversight council.
“[The FDIC] is guaranteeing over $6 trillion right now,” she said. “The FDIC has tremendous exposure to the system so we would like a real say on systemic risk issues. [Reform overhaul] is an institutional issue, not a turf issue or a personality issue.”
Additionally, Bair suggested creating a separate fund going forth for existing firms that are already “too big,” as a way to create economic disincentives for companies that put others at risk.
“We suggest that for very large financial organizations including bank holding companies, Congress should consider creating a fund—just as we do with a deposit insurance fund–that could be set up [for firms] that have risk-based assessments," she said. "So if an institution is extremely large, interconnected or imposes a risk to the system—they would pay a higher assessment.”