Bair, who predicted in December that bank failures would increase, has revised her thinking. “Some of the banks we thought would fail haven’t," she said, "and some have been able to raise capital.”
Bair also disputed criticism that the financial regulation bill would actually make it harder to regulate banks.
“The bill provides an orderly way for the government to take over a large financial institution, without taxpayer exposure,” Bair said. “It’s a process that small institutions have to deal with. We think that large institutions should deal with the same type of robust process that imposes losses on the shareholders and creditors.”
The legislation calls for a $50 billion resolution fund that would be paid for by large banks and would bail out big financial firms. Bair said the fund provides a way of paying for the “funeral” of a failed institution and would prevent another Lehman Brothers-type collapse from triggering a market panic.
“Bankruptcy doesn’t work,” she added. “It’s abrupt, it disrupts credit flow provided by a large financial institution. It immediately gives the right of derivatives counterparties to pull all their collateral out of the failing institution, which creates a lot of liquidity disruption.”