Sheila Bair has publicly disagreed with key planks of the U.S. Treasury’s regulatory reform proposals. The Federal Deposit Insurance Corp. chairman told Congress that her agency should retain oversight of consumer protection rather than cede it to a new agency and that it should have a role in overseeing systemic risk rather than have that job monopolized by the Federal Reserve Board.
Bair’s outspokenness hasn’t endeared her to Treasury Secretary Timothy Geithner, but it has earned the respect of many in Congress who will write the regulatory reform bill. Bair spoke recently with Institutional Investor International Editor Tom Buerkle.
Institutional Investor: Regulatory reform seems to be getting bogged down in interagency squabbles. Are you guys talking to each other?
Bair: I disagree with your premise. We’re an independent agency. We are asked by Congress for our views, and we provide our views. That’s not squabbling. That’s a legislative process.
We very strongly support the consumer agency. About 25 percent of our examiners do consumer compliance. Frequently when they find a compliance problem, it can be a red flag for more-fundamental management issues at a bank. To lose those synergies, I think, would weaken our examination force and the efficacy of our efforts.
Another issue is the systemic risk regulator. We have felt strongly that that kind of power should be vested in the [Financial Services Oversight] Council, not in the Federal Reserve. Hats off to chairman [Ben] Bernanke, for he’s really made heroic efforts. But institutionally, investing that much more power with the Fed is something we think is quite dangerous. That more often than not leads to regulatory laxity, not vigor.
The Treasury says its proposals for increased capital standards and closer supervision will be such that firms will not want to be designated as tier-1 institutions. Is that how you understand it?
I certainly agree that you do not want to reward being systemic. You want to punish it. You want institutions to be a level of size and complexity where they can fail without broader collateral damage to the banking system and the economy. We need a capital structure that deleverages the system and increases capital, that does it on a countercyclical basis for banks large and small to build up their cushions in good times so they can draw down in bad times.
Big banks resist the idea that tier-1 firms should be identified specifically. What’s your view?
Instead of defining what’s systemic through a tier-1 designation, maybe you define what’s not systemic. So take small institutions — $25 billion in assets, perhaps — and say that the special resolution regime or any higher capital requirements based on size and complexity would not apply to them. Above that threshold you might have some kind of graduated scale.
How can regulators impose limits on compensation without trying to dictate to the market what pay should be?
There need to be some principles. This is almost a case of saving the industry from itself. We are getting back into some bad behaviors, and it’s quite problematic. I think you can articulate principles related to long-term performance, structures related to long-term performance, preserving long-term shareholder value, in a way that doesn’t get prescriptive about who should pay what to whom.
There was a hope that the international entities could reach some type of agreement on this, but obviously, the fear is that if one jurisdiction clamps down on compensation, non-U.S. banks will cannibalize the teams of the U.S. banks. It may be that the U.S. should think about moving ahead on its own.
See related article, “Can Finance Be Fixed?”
