Commercial Loans Biggest Threat to Banks: FDIC’s Bair

Commercial loans are likely to be the biggest drivers of future bank failure, Sheila Bair, Chairman of Federal Deposits Insurance Corporation, told CNBC Tuesday.

Sheila Bair
Sheila Bair

Wall Street sold off sharply Tuesday on speculation that a big bank in the US or Europe may be heading for failure. Bair said investors should keep their cool, but warned that commercial loans overhang could still be a concern.

Commercial loans are “going to be a bigger driver of bank failures towards the end of this year into next year,” she said, adding that residential mortgages were still a bigger percentage of where the credit distress was right now.

“I think everybody needs to keep their heads,” Bair said on “The Kudlow Report.” “There's some positive news out there on the economy, and even though banks will continue to work through cleaning up their balance sheet, we saw a few glimmers of hope in the second quarter results.”

“I think we just need to say what we've always said, that it's going to take time to work through these credit losses, but we'll get out of this,” she added.

While it’s too early to call a recovery in the banking sector, the improving net interest margins, and the slowing rate of increase of noncurrents and charge-offs was encouraging, Bair said.

When asked about FDIC’s loss-share agreements, a program where banks are closed and the agency then shares exposure to losses with an acquiring bank, Bair defended the scheme, saying it saved the agency about $11 billion in the last two years.

“With loss-share, we can get our pricing up, and even though we realize the loss up front, we pay out the cash,” Bair said. “We pay out over a period of years as the actual credit losses occur, so it helps preserve our liquidity.”

“So we've had some good experience, and the loss-share also puts the assets in private sector management,” she added.

Case Against a Super Regulator

In addition, Bair reiterated FDIC’s stance against a having a super regulator for the banking sector, which is currently being pushed by the Obama administration.

“I think a monopoly regulator like that could make things worse, not better,” she said. “There hasn't been a great experience in Europe with these—with these monopoly regulators, and I think there is a tendency for them to become even more dominated by very large institutions, which I think would help—hurt the smaller institutions.”

A single banking regulator could undermine the country’s 150-year-old system of both state, federal chartered and separately regulated institutions, she added.

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