09 Mar.

Federal Deposit Insurance Corp. Chairman Sheila Bair outlined three points which must be part of any financial regulatory overhaul, but said market incentives must also be realigned to make credit markets function properly over the long term:

1) Ending “too big to fail”

2) Plugging gaps in regulation

3) New consumer protections

“Fixing regulation can only accomplish so much,” she said. “Rules and regulations can help constrain our ‘animal spirits,’ but unless economic incentives are also appropriately aligned, regulation alone will fail.”

Bair’s three key items for legislation:

1) Ending “too big to fail” — Should include a pre-funded resolution mechanism and a “clear mandate” to close large troubled firms that could threaten the broader economy. Shareholders and creditors would bear losses, not the public. “The lack of a resolution mechanism for these companies is not some minor loophole that needs to be closed. On the contrary, it was a fundamental cause of the financial crisis and the enormous economic costs resulting from it.”

2) Plugging gaps in regulation — Create a systemic risk council to share data and knowledge about financial markets.

3) New consumer protections – Create uniform regulatory standards for banks and nonbanks and ensure customers are well-informed.