FDIC Chairman Sheila Bair
FDIC Chairman Sheila Bair

WHEN: Today, Tuesday, October 5th at 6am ET

WHERE: CNBC's "Squawk Box"

Following is the unofficial transcript of a CNBC interview with FDIC Chairman Sheila Bair on "Squawk Box" today, Tuesday, October 5th at 6am ET. Excerpts from the interview will run throughout CNBC's Business Day programming.

All references must be sourced to CNBC.


BECKY QUICK reporting: Sheila, thank you very much for joining us today.

Ms. SHEILA BAIR: Happy to be here.

QUICK: You know, there's a lot that's going on in your world right now. Probably the thing that's getting the most attention is the Financial Stability Oversight Council, its first meeting last week. This has some huge problems that it's expected to tackle, things like the Volcker rule, trying to figure out which nonfinancial firm should be overseen to some extent, too.

Ms. BAIR: Right, right.

QUICK: What do you think the most complicated and difficult problems are going to be?

Ms. BAIR: Oh, well, there's so--I mean, the central mandate of the council is to identify both systemic institutions as well as policies and practices that could pose--have--that could have systemic implications. So that is clearly their primary focus. There are certain discrete areas like the Volcker rule where the Congress specifically said they wanted the FSOC to take an active role. So, you know, I think it is challenging, and--but it has to be done. It's just going to be hard work, and I think, you know, people need to understand that and adjust their expectations, which you've got a lot of very smart people on the council, and so I think we will come together. We are working together to get this job done and, you know, we all have accountability now. So I think that can be an added--an added prod, no escaping. We're behind our various jurisdictional spheres. We all--we all have ownership of it now. I think that's good.

QUICK: How does it work to have so many different regulators in the room, though?

Ms. BAIR: Right.

QUICK: Because a lot of times they have different mandates.

Ms. BAIR: Yeah.

QUICK: How do you get on the same page?

Ms. BAIR: I think it's--well, getting us all in the same room is a good start. And I think, you know, we had a nice roundtable discussion in closed meeting about some of the issues we thought the FSOC should be working on, and it was great because we did have different perspectives, and obviously the FDIC's very focused on monitoring this regarding insured banks, and the SEC and the CFDC were at the equity and the securities markets and the derivatives markets. And then the Fed has somewhat of a broader view on monetary policy and interest risk and perhaps more of a global perspective. So I think all of those coming together was good, and we have, as nonvoting members, there are some state financial supervisors, insurance and banking securities, and they brought kind of a nice grassroots, you know, ground-up perspective as well, some of the things they were saying. So I thought it was a--it was a good blend of views. I thought it was very helpful.

QUICK: I know it's only been one meeting so far, but was there something that you walked out of the meeting saying, `Huh, I hadn't thought of that before'?

Ms. BAIR: I wouldn't say the first meeting, but I think--I think that will happen. This is a very preliminary meeting, and most of the folks I know will and there have been a lot of other meetings with, so. I think there were some additional perspectives, some different, you know, on--we all kind of shared our worry list, and it was interesting to see who was worried about what, and--so we constantly group our angst together. There's probably a lot of angst out there, but I think actually some of the things that other regulators were saying I found reassuring because they had a closer perspective on certain products or certain markets. So, again, I thought it was a good blending of views and I look forward to having more meetings.

QUICK: What's your biggest concern, your biggest worry when you look at the financial markets right now?

Ms. BAIR: Right. Well, I think we are much more stable now, and the financial system in the US is healing. And so I think, you know, on the immediate, on the short term, we absolutely have to deleverage the system. We need to get the capital...up. We need to get rid of too big to fail, we need to restore market discipline to the system. Those will all have long-term stabilizing effects, and so those are very much priorities for us at the FDIC. Longer term, I do worry about interest rate risk and the ramifications of this very long, protracted period of very low interest rates. Eventually they're going to start going up, and what happens? A bit of a bond bubble now, it appears, and so how do we deal with that? I think there's a lot of liquidity out there, a lot of money looking for return to chase, and so trying to stay ahead of that and look at where it's going and what type of new risk that might present, I think is something we need to be very aware of.

QUICK: You mentioned the bond bubble, and that's something we talk an awful lot about...

Ms. BAIR: Right.

QUICK: ...trying to determine if one does exist.

Ms. BAIR: Right.

QUICK: What makes you think it is a bond bubble?

Ms. BAIR: Well, I don't know if it is. I think it's something that we need to be very aware of. It's just that--but it's just, again, the broader issue of a very long, protracted--a very long, protracted period of low interest rates, a lot of money seeking very safe investments or perceived to be safe investments; and so that combination, I think, can put upward pressure on bond prices. So I think it's just something to be aware of. I think it's a long-term issue, not so much short term, but I also think, at least in terms of Treasury securities, it is something that the Congress and the administration need to be very aware of, as well. I think things are fine now, but if we don't get our fiscal house in order and have some clear plan for greater and more responsible budgetary management, I think it could become a problem later. And so I hope people are very focused on that.

QUICK: You know, we talk to bankers all the time.

Ms. BAIR: Mm-hmm.

QUICK: And a common complaint we hear time and time again from these bankers is that they are being pushed in different directions from the regulators and the politicians.

Ms. BAIR: Mm-hmm.

QUICK: On the one hand, they're being told that they should be very careful with the loans they're making...

Ms. BAIR: Right.

QUICK: ...that they don't want to get into a risky arenas.

Ms. BAIR: Right. Right.

QUICK: On the other hand, they're being told they need to lend more to consumers and small businesses.

Ms. BAIR: Right.

QUICK: So where do you come down on that?

Ms. BAIR: Right. Well, I think, listen, we learned the hard way the—with the mortgage crisis that you don't do anyone any favors by making them a loan they can't repay.

QUICK: Mm-hmm.

Ms. BAIR: And that's true whether it's to small business or anyone else. So we want a balanced approach. There is inherent risk with any loan, and so there needs to be some major prudent risk taking when you make a loan and extend credit, but I think just following basic commonsense underwriting standards, we can get some credit, more credit out to support the economy in a way that does not endanger the safety and soundness of the system. I think, with small business in particular, Congress has approved a new program for—to provide some additional support for small business lending, and so we hope those measures will be effective. I think with a lot of small business lending, so much of that was collateralized with home equity loans...

QUICK: Right.

Ms. BAIR: ...or with commercial real estate. And both with home prices down and commercial real estate levels down, the collateral's not there anymore for new lending. So I think that has been an impediment, which again is a good reason, I think, for the government to step up in a targeted way, especially for small business lending. But we try to strike a very balanced approach, always have. We want you to lend, we want you to make prudent loans. We want you to lend. We're asking banks a lot, we're asking a lot of the examiners, too, to try to take a balanced approach. But I think, you know, and I say this and I know the larger banks maybe are unhappy sometimes when I say this, but the smaller banks seem to be keeping the loan balances up a little better than the larger institutions. And I would say, in fairness to all institutions, that there is a borrow demand, as well. It's not all borrow demand, but borrow demand is down. And again, that gets back to uncertainties about the economy, and for people to really start committing, starting businesses, expanding businesses, whatever, they need to have a better sense of what the economic direction's going to be.

QUICK: I can think of about four or five bankers who would yell at that statement, big bankers.

Ms. BAIR: Mm-hmm.

QUICK: What makes you think that the small banks are doing a better job than the big banks

Ms. BAIR: Well, just in terms of loan balances. Quarter after quarter, we see the loan balances of the very smalls have gone up slightly and are more level, where you still see some fairly significant percentage decreases quarter over quarter for the very largest institutions. So I know that's just--that's just--those are just the facts, and I think they say, well, a lot of that's from charge offs, and some of it is from charge offs, but not all of it. And so we do see some differences there, and so I do jawbone them a little bit and, you know, in fairness to them, borrow demand is down, got that, but I think maybe we can do a little better job of looking to extend credit to credit-worthy borrowers.

QUICK: Have you spent much time with Elizabeth Warren to this point?

Ms. BAIR: Yes. Elizabeth is on our advisory committee on economic inclusion, so I got to know her a few years ago through her membership on that group, and so had a nice chat with her this past week. And, you know, we are--we were always very supportive of the consumer agency, wanted to do what we can to help get that up and running, and so she's got a big job in front of her, and so she's a very talented person, so we'll do what we can to help her.

QUICK: Do you think your agency will see eye to eye with her agency from the get-go?

Ms. BAIR: I hope so. You know, I think she has articulated priorities, which I share about trying to simplify some of our consumer rules, make better disclosures. The market will work better if consumers understand more clearly what kind of product they're getting and what they're paying for. And so I think that helps everybody, and I think the smaller banks in particular, I think a simplification of some of these rules can actually help reduce some of the reg burden. That's the problem with really complicated compliance rules. It doesn't really impact the large institutions. They have these huge legal operations and, you know, complicated disclosures and whatever. They have the, you know, the financial wherewithal to deal with that much more so than the smaller institutions, so I think that should--simplification for all institutions, large and small--should prompt a responsive chord, and so I think that's a good area to focus on. And so I think she's done some industry outreach, and I think it's good. You know, ultimately we're here to serve the public, and that must be the primary goal, and I think banks understand that, and most banks want to do the right thing. So I hope everybody works together constructively to tackle this in a way that will make the system work better because it hasn't worked well for consumers. I think we need to acknowledge that.

QUICK: You know, over the last several weeks have been some big concerns about some of the European financials, some of the banks there...

Ms. BAIR: Right.

QUICK: ...whether or not they're capitalized, whether they still have toxic assets on their balance sheets. There's a general sense in the market that our banks are in much better shape. Do you think that's a fair assessment?

Ms. BAIR: Well, I think our banks are in pretty good shape. I think we need to get the capital levels up, but, you know, our analysis indicates that, for instance, in the Basel rate capital accords, even if you deduct what they can no longer treat as tangible common equity from the current capital base, if you deduct that, their TCE, their tangible common equity ratios are above 6 percent. So getting up to 7 is not going to be a huge lift. They can easily do it through retained earnings, I think much earlier than the 2009—excuse me--not 2009, the nine-year transition period.

We've, for the very largest institutions; we think it's appropriate to have a surcharge, what they call a SIFI surcharge, systemic surcharge for larger entities. But again, their capital levels are significantly stronger than other parts of the global financial system. So I think getting there over a reasonable period of time should not be a big challenge, and the long-term benefits of having a more stable system when the next cycle comes, having a bigger capital cushion to absorb those losses so we don't have to give it--into failures and all the ugly things that we got into this past crisis don't recur.

QUICK: You know, one of the big points of contention with the banks, at least, has been the FDIC's move to require when it comes to securitization for consumer loans...

Ms. BAIR: Right, right.

QUICK: ...that they hold onto 5 percent.

Ms. BAIR: Right, right.

QUICK: Some banks have pushed back and said, `We can't afford to do that.'

Ms. BAIR: Right, right.

QUICK: What do you say to that?

Ms. BAIR: Right. Well, first of all, it's a lie. Dodd-Frank. It shouldn't be a surprise to anybody. We had that out for over a year. You know, I don't, you know--banks in the old days, banks kept a lot of--bought back a lot of the securities that were generated through loans that they originated and issued in...

I will say that if they don't like the 5 percent, then we are more—and welcome--expeditiously working with our fellow regulators on some good strong lending standards to have qualified residential mortgages, and if those are good strong lending standards that the new mortgages adhere to going into the securitization pools, we won't have to have the 5 percent. But I think if we have learned anything, it is that the originate to distribute model puts—it creates incentives for lax lending. We saw it, that's what happened. And so I really don't want the parties to start up again, and so we think it's prudent to have this 5 percent in place until the regulators can have, a cross-market good strong lending standards to define what kind of mortgages will qualify for these securitization pools so investors can have confidence that they're good, high-quality-performing loans in those pools. And then I think the 5 percent's appropriate to lift it, and that's what the statute contemplates. So I think if they don't like the 5 percent, let's work expeditiously to get these new lending standards in place.

QUICK: And then the 5 percent goes away completely, or it gets dropped?

Ms. BAIR: For qualified, yes.

QUICK: Qualified.

Ms. BAIR: According to the statute, the statute contemplates--you can drop it or eliminate it, but I think for a good--we would be happy to eliminate it, again, if there are good strong lending standards--good strong definitions of qualified residential mortgages, which the agencies agree to. And so I think that is really where the focus of the efforts should be now.

QUICK: Sheila, TARP is officially done at this point.

Ms. BAIR: Right, yeah.

QUICK: It's gone. What do you think of this program? I know at one point, maybe in 2009, you had said you weren't sure it was a great idea for some of the banks.

Ms. BAIR: Well, you know, I never want to go back there, OK? I mean, I've got some of the reasons why we want capital levels up, we want a resolution mechanism in place so that there's an orderly way to unwind these very large entities if they do get into trouble again. With the stronger capital we will reduce the likelihood that that one of them will get into trouble, but you, you know, Warren Buffett had a funny saying which he said--I've seen him quoted as saying once that, "Never invest in a company that an idiot can't run because sooner or later one will." So I mean...

QUICK: I think you...

Ms. BAIR: Saying regulators somewhat have to take that perspective in terms of setting capital and basic regulatory requirements. You don't set capital for the well-managed, strong institutions. You just use--you set them for those that are going to end up, you know, with bad management. And so you'll always have that kind of situation. So we really need to be prepared for the future, but I think with the higher capital and the resolution authorities now, we will never get in a situation where the US taxpayer is asked to put capital into large financial institutions. It turned out--I think it is turning out better than we had expected, and that's good news. There's still some unknowns, obviously, but what the ultimate losses will be. And then, of course, so will the Fannie and Freddie issues, so there's still a lot of taxpayer exposure there that was necessitated by all this instability. But going forward, I think Dodd-Frank does give the regulators important tools to make sure we never have to do a TARP again.

QUICK: All right. Sheila, thank you very much for your time.

Ms. BAIR: Sure. Good to see you.

QUICK: Appreciate it.

Ms. BAIR: You bet.

About CNBC:
CNBC is the recognized world leader in business news, providing real-time financial market coverage and business information to more than 340 million homes worldwide, including more than 95 million households in the United States and Canada. The network's Business Day programming (weekdays from 5:00 a.m.-7:00 p.m. ET) is produced at CNBC's headquarters in Englewood Cliffs, N.J., and also includes reports from CNBC news bureaus worldwide. Additionally, CNBC viewers can manage their individual investment portfolios and gain additional in-depth information from on-air reports by accessing

Members of the media can receive more information about CNBC and its programming on the NBC Universal Media Village Web site at