Chairman Bair made remarks on the financial crisis in a speech to students at Kansas State University, including her own ideas for the regulatory reforms that she believes are necessary to pull the US economy out of its slump and create a financial system that is stronger and more resilient to market downturns. Ms. Sheila C. Bair grew up in Independence, Kansas, and opened her speech by saying that like most Kansans, she was raised to be honest and direct.

Kansas State University
Kansas State University Photo by Michael6076

Addressing the Issues

Ms. Sheila C. Bair was certainly direct in her speech, giving a bare bones account of the economic climate leading up to the crisis, and some of the steps taken this far by the FDIC in an attempt to stabilize the economy. Perhaps most interesting, however, were her comments on regulatory reform, which tackled everything from ending “too-big-to-fail” to protections for the America consumer.

Too Big to Fail

On the issue of “too big to fail,” Chairman Bair stated the importance of competition in any economy, and for an economy to be healthy, those businesses that remain viable must succeed while those which are no longer viable must fail. When companies become so large and interconnected that they will not fail despite mismanagement and excessive risk taking, then the economy suffers. Bair warned that the FDIC, which is only authorized to deal with depository institutions, does not have the power to close complex financial institution, but without someone to regulate these institutions, we are setting ourselves up to have to repeat the bailouts of the past year.

Sheila C. Bair
Sheila C. Bair

In order to deal with this issue, Bair said that the US must work to close regulatory gaps and create incentives for companies to reduce their size and complexity. She suggested that the FDIC model, adapted so that it applies to more complex financial institutions, would help regulate these larger companies. Also, by imposing fees on riskier activities and requiring higher capital ratios for large, complex institutions, banks would be less willing to take on high risk activities. Bair also suggested that the subsidiaries and affiliates of these large companies remain more independent, so that they can be easily break up and fail separately if faced with liquidation.

Stronger and More Resilient Financial System

On moving forward with regulatory systems, Sheila C. Bair proposed a Systemic Risk Council, which would be made up of a group of national regulatory agencies and have the power to step in and take action to prevent future situations like that of this past year. The Council would be able to set industry standards and fill regulatory gaps to ensure that the public interest is being protected.

This focus on the protection of the consumer was one of Bair’s main takeaway points. She emphasized the importance of banking transparency in the future, saying that many of the problems of the past year, especially in the mortgage sector, were due to confusing contracts and hidden fees that banks impose on unsuspecting consumers. By focusing on protecting the consumer and being clear about the terms of loans and accounts, she thinks that everyone will benefit, as many of the problems with bad credit and unpaid loans by uninformed consumers will disappear.

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