"One of the reasons we've had the markets seizing up the way they have is a lack of trust, an inability to evaluate underlying asset quality," Bair said. "We've been relying too much on mathematical models to assess risk, to base ratings, and those are just not reliable indicators when you have a situation, particularly with new products, higher-risk products that really have no reliable track record."
Bair was asked about the proposed bail-outs of troubled bond insurers.
"The big issue for banks has always been, what's more risk, to provide the capital investment or not to provide the capital investment," she said. "It sounds like it's moving in the direction of providing it. I think at the levels we're talking about, it doesn't present supervisory concerns, and I do think that's very positive. It looks like it's going to get worked out."
She said her agency is keeping an eye on increasing delinquencies in commercial real estate, credit cards and auto finance, but is confident that the banks under her agency's supervision will survive.
"We are in a more challenging credit cycle, but banks are very well capitalized, and we went into this challenging environment in a very strong position," she said.
Bair expressed reservations about solutions such as Democratic presidential candidate Hillary Clinton's plan for a five-year freeze on variable mortgage rates.
"If it's a statutory mandate, I think there may be issues regarding abrogation of contract," she said. "We've tried to provide systematic modifications through voluntary agreements to provide that five-year extension."