Former FDIC chairman Sheila Bair joined Bloomberg Television’s Trish
Reagan and Mike McKee on “In the Loop with Betty Liu” and said excess
leverage at banks is the number one problem still not solved following
the financial crisis. Bair said that risk-weightings penalize lending,
banks aren’t cooperating enough with regulators, and banks need to
reduce reliance on short-term debt and simplify their legal structures.
She also said it is possible for banks to function properly without
restoration of Glass-Steagall by ensuring “firewalls of integrity.”
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Bair on not doing enough to make sure a Lehman Brothers like event is never going to happen again:
“I don’t think we have done nearly enough. Banks. There are a lot of
problems. The one at the top of my list banks, large financial
institutions still have way too much leverage. If you look at their
off-balance sheet exposures, the amount of risk that is being supportive
by tangible common equities is about 3.5 percent to 4-percent. They are
way too over leverage. We have put more capital into these banks as a
result of the stress test, but we started at a low baseline. Leverage
was a key driver of the crisis and the fragility of the system and the
reason we needed bailouts, they did not have enough equity to absorb
losses once the losses came. We need to reduce their reliance is on
short term debt. We need to simplify their legal structures. I would
wall off in insured deposits from securities and derivatives trading
activity make sure it just supports commercial banking.
On a return to Glass-Stegall:
“It is okay to keep them in the same organization so long as the
securities and derivatives activities are walled off from the insured
bank. I think you can have five-walls of integrity. Regulators have the
authority to do that now under Dodd Frank. Regulators have the authority
to do that now under Dodd-Frank.”
“I think Citigroup is kind of the poster child for how the repeal of
Glass-Steagall Act created banks that were too big to manage. So, yes,
it is one of the factors, but I think excess leverage is really at the
top of my list leading up to the crisis and still is something that has
been fixed.”
On whether the financial power of the banking industry is too great for any additional reform:
“Well, it is disheartening. They’re lobbying has been relentless. I
have been long enough to remember when industry worked constructively
with regulators and tried to instill public confidence in a regulatory
system, and to see credible regulators as in their interest. We don’t
see that anymore. It is a game of winners and losers. They say they want
the rules finished, but the rules that they would like, that frankly do
not do much. Unfortunately a lot of the rules worked around the edges
make marginal improvements, but fundamental transformative changes we
just have not seen.”
On whether the lack of additional reform is ‘all about the money’:
“Yes, the industry, I don’t think the industry lobbying effort has
been a responsible one, and it saddens me. It still undermines trust in
the financial sector to see this spectacle in Washington. Sometimes
Congress puts on that puts pressure on regulators to back down. And yes
political money plays a role in that. I think the revolving door plays a
role. Even the best of people, if your career path is to go to work for
a bank or a consultant who works for a bank, that you are now
regulating and writing rules for it’s going to infiltrate your thinking
even if you try and insulate yourself from that. My book, at least on
examiners and much stronger restrictions on regulators going into the
industry. There are other career paths that you can choose. Right now it
is pretty much accepted practice, and I do not think it is a problem.
What we call cognitive capture, regulators just starting to identify
that their job is making the banks profitable. I think that was a
problem, a misguided notion in our bailout initiatives when the system
spun out of control. We needed to do something but we are very generous
with the banks. They are as profitable as they have ever been, but the
economy is still hurting.”
On those who say we need less smaller banks, and just more big banks:
“I don’t know. You have to double the number of participation or
increase it by a third. You already have to bring in participation with
those big deals. Even the mega banks will not take deals on their own,
so they’re already sharing those transactions among a number of banks. I
am more for simpler banks as opposed to size. I do think sheer size at
some point you get into questions about market power, political power,
but I think the complexity, intermingling commercial banking with market
making and derivatives market making supporting all of that with
government safety net programs, I think that is very hard. I think there
are very different skill sets that are acquired with the security and
derivatives market making operation in traditional commercial banking.”
On critics saying she wants to make these banks more akin to
utilities than financial service institutions that are making money:
“My critics have said that I have said that. They have a principled
position on that. No, I want these guys to stand on their own two feet. I
want market discipline, I want better disclosure, I want understanding
what they are on the hook for losses if they get into trouble. I want
higher capital requirements, you bet. They are very large and complex
now, and they have access to government safety net programs and that the
increases their incentive to leverage. We need much stronger capital
requirements and that will create market incentives to downsize because
it will increase their funding costs, especially if they have tougher
capital and long-term debt requirements. Plus if they are understanding
they will not get more bailouts, that will create market pressure to
downsize. That is encouraging regulation to make the market work the way
it should.”
On whether new resolution powers under Dodd-Frank helped to put a
failing major institution out of business and whether that is a process
of failure before it even begins:
“No, I don’t think so. The FDIC has said is a single point of entry.
They have thousands of legal entities under them, and those need to be
downsized. They need a smaller number and they need to restructure them
on business lines. For now the best way to do it is to take control of
the holding company which owns and controls this morass below, put that
into receivership have the creditors and the shareholders of the company
on the hook for losses and at that point you can make a decision about
foreign operations, whether they are viable and add franchise value and
the new receiving, the FDIC wants to continue to support them, or
whether you want to spin them off into the bankruptcy authorities of a
former jurisdiction. I think that model can work absolutely to resolve
authorities of a former jurisdiction. I think that model can work
absolutely to resolve an internationally active bank and the FDIC is
doing bilateral agreements with most of the key jurisdictions so that
the one jurisdiction will respect their authorities as receiver and
owner of the holding company to be able to back foreign operations where
that is appropriate. I absolutely think it can work.”
On the number of the higher capital requirements that she would like to see:
“What I argue in my book and the group I had the systemic risk
council has advocated for is a minimum of 8% for Basel 3 leverage
ratios that means only tangible common equity on top, and on the bottom
not just on balance sheet exposures, but a lot of off-balance sheet as
well.”
On whether that will affect their ability to lend out:
“Oh, my gosh, no. The risk-weighted capital rules that regulators
relay on now, actually penalize lending, so you’re pretty much at eight
percent already. You are eight percent for lending… It is the banks, the
big securities and derivatives operations, which perversely the capital
rules treat as lower risk than loans. They are the ones who have a lot
of leverage. Increasing the leverage ratio will create better incentives
to lend because it will reduce the amount of leverage you can use to
fund securities.”
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