Former FDIC Chair Sheila Bair expects more pain ahead for US banks

Brexit impact on banks

There is more pain ahead for U.S. banks, thanks to Brexit and low interest rates, former FDIC chair Sheila Bair said Monday.

Federal Reserve monetary policy has kept rates low, with only one post-easing rate hike occurring in December. Now that the U.K. has decided to leave the European Union, the likelihood of another increase this year has been dramatically reduced, Bair said in an interview with CNBC's "Closing Bell."

That means banks are going to have continued pressure on their margins, and will probably look for more trading revenues and fee-based revenues.

"Longer term, hopefully we'll get back into a more normalized interest rate environment. I think longer term that provides for a more stable economy," she said. "But in the short term there's still going to be a lot of pain. You are going to see a lot more fees, probably."

But a delay in a Fed rate increase is only one of the downsides of Brexit, according to Bair, who is now president of Washington College.

She thinks it will also increase the cost of doing business across the pond, since U.S. banks will probably no longer be able to use London as a launching pad to do business in the EU. That means they'll have to create separate subsidiaries on the continent, and that increases operational costs.

Plus, credit losses may go up for those doing lending in Britain.

Fiscal stimulus needed

Bair isn't a big believer in the Fed's monetary policy to stimulate real economic demand. Instead she'd like to see some type of fiscal stimulus like smart infrastructure spending programs.

"The Fed has given the government all this ability to issue really cheap debt, and I don't think it's been used very well," she said.

"I think it's been ill-advised to rely on monetary policy, but that still appears to be the only game in town."