WASHINGTON — The head of the Federal Deposit Insurance Corp. said Friday that loopholes need to be filled in new Senate legislation to ensure an end to the "too-big-to-fail" approach that brought the government rushing in to bail out big banks in the financial crisis.
FDIC Chairman Sheila Bair said her agency has concerns about parts of the Senate bill unveiled this week, which "seem to allow the potential for backdoor bailouts" through the powers of the Federal Reserve.
The bill would create a powerful Financial Stability Oversight Council to monitor the health of the financial sector and push for the breakup of large complex firms to prevent them from becoming "too big to fail." The nine-member council, which would include the FDIC, the Treasury Department, the Fed and other agencies, could place big, interconnected financial institutions under the Fed's supervision.
The legislation would give the Fed new powers to oversee nonbank financial firms so big and interconnected that their failure could threaten the economy.
"We will work closely with the Senate to make sure there are no loopholes around the carefully crafted resolution procedures," Bair said in an address to a convention of the Independent Community Bankers of America in Orlando, Fla.
"If the Congress accomplishes anything this year, it should be to clearly and completely end too big to fail," Bair said. "Never again should taxpayers be asked to bail out a failing financial firm. It's time that the big players understand that they sink or swim on their own."
Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking Committee, unveiled the legislation 18 months after Wall Street's failures helped plunge the nation into the worst recession in decades. It is a blueprint for the biggest overhaul of financial regulations since the New Deal, giving the government unprecedented powers to split up firms that are deemed to threaten the economy and creating an independent consumer watchdog.
The bill also would force large, complex financial firms to pay insurance premiums in advance for a $50 billion fund to cover possible failures in their ranks. The fees levied up front would give the FDIC an immediate source of funds to resolve big failed institutions, so that taxpayer money wouldn't be used.
The costs of resolving smaller banks that failed would continue to be covered by the federal deposit insurance fund.
"We have just come through the greatest financial crisis since the 1930s, and for many of you it's not over yet," Bair told the community bankers in a text of her speech.
The House passed its version of overhaul legislation in December. As Dodd's package — unsupported by any Republican senators on his committee — moves closer to a vote on the Senate floor, the financial industry has ramped up its lobbying campaign against the legislation.
"Community banks are essential to the economy, but many of them are experiencing acute credit distress," Bair said. "The credit crisis, which began on Wall Street, is now mostly being felt on Main Street."
Since the start of 2008, more than 195 banks have failed in the U.S., nearly all of them community banks. They have cost the deposit insurance fund, which fell into deficit last year, more than $58 billion. The pace of bank failures is likely to accelerate in coming months, regulators have said, as losses mount on loans made for commercial property and development.
Earlier this week, Federal Reserve Chairman Ben Bernanke urged Congress not to scale back the Fed's regulatory authority over banks, saying the central bank needs the information it gleans from its bank oversight to set interest rates and assess the health of the banking system.
Dodd's bill, while augmenting the Fed's powers to oversee big financial firms, also would strip its power to supervise state-chartered banks and bank holding companies with assets of less than $50 billion.