WASHINGTON -- Federal Deposit Insurance Corp. Chairman Sheila Bair said Friday her agency may tap its $500 billion credit line with the U.S. Treasury to replenish its deposit insurance fund, though she appeared cautious about doing so.
"We are carefully considering all options" including borrowing from the Treasury, Ms. Bair said Friday after a speech in Washington.
Ms. Bair has already warned banks that they may face an assessment increase to bolster the fund. Friday, she said there are also other little-known options available to the agency, including requiring banks to prepay assessments. The FDIC board of directors will meet at the end of this month to consider how to replenish the fund, she said.
Ms. Bair appeared cautious about resorting to the Treasury credit line, saying there are different views on when it should be used. She said some believe it should be reserved for emergencies only, rather than for covering losses that are already known.
Congress acted earlier this year to allow the FDIC to borrow as much as $500 billion from the Treasury if the Treasury, the Federal Reserve and the White House believe it is warranted. Otherwise, the agency can borrow up to $100 billion.
The financial crisis has clobbered the FDIC's deposit insurance fund, forcing the agency to impose a special assessment on the industry to rebuild the fund. Ninety-two banks have failed so far this year. The deposit insurance fund fell by $2.6 billion to $10.4 billion during the second quarter, after 24 banks went bust.
In a speech at Georgetown University's McDonough School of Business, Ms. Bair strongly cautioned the Financial Accounting Standards Board, or FASB, against expanding market-to-market accounting rules to bank deposits and loans.
Currently, banks are required to write down certain securities to market values when they become impaired. FASB is proposing to extend that to other bank assets, such as loans and deposits.
Ms. Bair said the move would create more volatility for bank balance sheets, exacerbating the financial crisis, with no measurable improvement in transparency.
"Marking banking assets to market prices doesn't make sense," she said.
Ms. Bair argued that policy makers, after the extraordinary government interventions of the past year, need to work now to dispel assumptions that certain "too big to fail" companies will be bailed out. She said larger, riskier firms should face higher capital charges. She also repeated arguments for creating a process to wind down teetering nonbank financial firms similar to the FDIC's system for resolving banks.
"The process is harsh. It is painful. But it works," she said, by sending "a strong message that investors and creditors face losses when banks fail."
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