All Signs Point to Improving Bank Sector: FDIC's Bair

Credit quality and earnings are strengthening, meaning the banking sector is on the upswing, FDIC Chairman Sheila Bair said Tuesday.

“Almost all the indicators are pointing to an improved banking sector,” Bair told CNBC. “We think bank failures peaked last year. It will be significantly lower this year.

“The deposit insurance fund is getting healthy. We think we’ll be in positive territory before the end of the year. The banking sector will continue to mend quite nicely.”

Bair said prudent lending is the best way to produce “real, sustainable earnings.” Currently, she said some bad loans are covered by loss-loan provisions, which don't promote earnings.

Community bankers challenged Bairlast week about possible rules relating to the Dodd-Frank Act, passed into law last year. The law is aimed at averting a repeat of the 2008 financial crisis, Bair said, and many changes it proposes will affect larger institutions only.

“It [Dodd-Frank] is really is targeted to larger institutions and some of the risk-taking that’s going on the derivatives, on the proprietary trading, on the securitization rules,” she said. “When those [rules] come out in a week or so, community banks will see that the regulators are taking steps to ensure that they’re insulated from impact of these reforms.”

Bair said community bankers are under the wrong impression that new overdraft guidance comes from Dodd-Frank. She said that, in fact, it stems from a move from agencies in 2005 to protect consumers charged with high overdraft fees and affects only those banks—about 40 percent of them—that use computer-generated overdraft programs instead of dealing with customers personally. She said the FDIC recently issued more guidance on handling abuse of overdrafts.