FDIC chair advocates "holistic" approach to financial regulation

Sheila Bair, the head of the Federal Deposit Insurance Corp., endorsed a "more holistic approach to regulation" Monday, saying the government needs to stop propping up "too big to fail" institutions, start plugging regulatory gaps and institute greater consumer protections. 

In her prepared remarks to the National Association for Business Economics, Bair emphasized the trouble that regulators have unwinding large, non-bank "behemoths without creating grave disruption in our financial system"

She advocated for a pre-funded mechanism, similar to the FDIC's ability to take receivership of banks, that would allow the government to quickly sort through claims against them while protecting taxpayers.

"Let me be clear - this would not be another bailout mechanism," Bair said. "Shareholders and creditors would bear the losses, not the public. But the process would be orderly and help prevent a catastrophic collapse of other firms."

Bair pushed for the creation of a "systemic risk council" that would promote collaboration between various regulatory agencies so that risky activity does not fall in between jurisdictional gaps.

She also backed consumer protections, emphasizing that they would not seek to achieve "some social or political objective" but would instead put an end to "asymmetric information" - such as borrowers who don't understand sub-prime loans - that prevent markets from operating efficiently.

 "In this light, I think there is a strong case to be made that basic consumer protections help markets function better by reducing information gaps between lenders and borrowers," she said.

She said some companies may be "exploiting this information gap" at the expense of companies that seek legitimate business.

"Let us recognize that consumer abuses were one of the root causes of the financial crisis and that regulatory reform legislation should squarely address this problem," Bair said.