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More Fed Easing Won’t Push Banks to Lend: Bair

Additional easing from the Federal Reserve won’t result in more bank lending, Sheila Bair, the former chair of the Federal Deposit Insurance Corp., told CNBC’s “Squawk Box” on Monday.

Sheila Bair
CNBC
Sheila Bair

“If I had any confidence [that] it would help lending support real economic activity, I would say go for it, but there are significant risks," Bair said.

She said central banks have become the only game in town in both Europe and the U.S., but “QE is not resulting in more lending.”

Instead of the Federal Reserve, Bair said it’s Congress that should be working on policies to address unemploymentand the country’s fiscal issues. (Read More: Markets Crave Stimulus—Will the Fed Give Them Their Fix?)

Without congressional action, the Fed is in a difficult position, Bair noted, adding “I don't think QE3is going to help, and I think there’s a risk to it.”

Bair worries about inflationand “the Fed’s ability to control the interest rate environment when that happens.” (Read More: Fed Easing Could Create Asset Bubbles in Asia, ADB Warns.)

She also sees issues with big banks being able to substitute long-term funding with cheaper insured deposits. “I want the big bank funding costs to go up, because they had implied subsidies before the crisis,” she said. “But the problem is the Fed is letting them roll out the long-term debt onto insured deposits which are explicitly guaranteed by the government.”

While this is resulting in lower funding costs and an improvement in net interest margin, the government is on the hook for it should a bank run into trouble. She added, that some of the benefit we’re getting of having banks rely less on volatile short-term funding is "being dissipated."

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