In hopes of avoiding another bank bailout, FDIC chairwoman Sheila Bair took to the stage this Thursday during the Federal Reserve Bank of Chicago’s 47th annual conference on Bank Structure & Competition to encourage new regulations among community banks and those that are too big to fail.

Last year, regulators moved to instate the Dodd-Frank Financial overhaul in order fix the troubled financial industry. What resulted was a bunch of angry banks and even angrier customers.

As a quick recap, the Dodd-Frank Wall Street Reform and Consumer Protection act is a federal statute that was signed into law in mid-July, 2010. Its main objective is to create transparency and improve accountability within the financial industry. Unfortunately, some of the regulations passed harmed bank’s profits which banks then took out on their customers by increasing fees.

After last night’s meetings it looks like regulators are coming back harder and stronger. According to Bair the best solution to avoiding another financial crisis is by creating a two-tiered regulatory system that will now suck in small banks as well.

Previously small banks did not have as much to worry about with the financial reform because it was mainly targeted at big banks. In fact, some small banks even saw a benefit to the regulations, considering their bigger and stronger competitors were struggling.

Smaller banks may have been celebrating too early, as FDIC chairwoman Sheila Bair suggest to impose more regulations that would affect small banks. The Dodd-Frank act also has a clause that allows for the regulation of systematically important financial institutions or SIFIs. These are banks that are not quite as big as the “too big to fail” banks, but are definitely big enough to cause risk.

The clause that will provide a resolution to SIFIs has three parts to it; 1). The Financial Stability Oversight Council (FSOC) is the group responsible for designating which institutions are considered SIFIs, 2). If a bank is categorized as an SIFI it then will be watched under the critical eye of the Fed. The bank must also report resolution plans to the FDIC showing that they can be saved through bankruptcy, not bailout. 3). The final step is another way to save a financially distressed bank through an Orderly Liquidation Authority (OLA). An OLA gives the FDIC certain powers to temporarily take control of and fund the financial institution and pay partial recoveries to creditors. This way it is not quite a bailout, but it still reduces the negative impact of a failed bank.

Basically, Bair has been pushing for “organizational changes” and advanced planning on the part of the Fed in order to prevent a financial crisis. The banks that are affected by these regulations are ones that have $50 billion or more in assets, along with the ones regulators deem as falling under the criteria for an SIFI.


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  • Anonymous

    So there will be several classes of banks now–

    1. Too big to fail. This is where the regulators work when they’re not pretending to be public servants. They play by their own rules, own the politicians, and pass any additional costs on to whoever they choose.

    2. SIFIs. This is where banks are classified if they’re ticked off someone either among the “too big to fail” crowd, or some politician. The wrath of God has been called down upon them.

    3. Mid-sized banks. So long as they play nice with their big brothers and observe all the costly rules, they won’t be classified as SIFIs.

    4. Small banks. So long as they keep their mouths shut and keep the politicians happy, they don’t have to observe all the costly rules.