FDIC's Sheila Bair on Bank Failures and Too-Big-To-Fail

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Sheila Bair, chairman of the U.S. Federal Deposit Insurance Corp

The recession and crippling credit crisis of the past two years took down some of the biggest names on Wall Street, led to the collapse of huge financial institutions and put political careers in jeopardy. But one person whose reputation has flourished in all of this mess is Sheila Bair, chairman of the Federal Deposit Insurance Corp. the nation's insurance backstop for bank deposits.

Bair saw the far-reaching credit meltdown a little earlier than others and started lobbying the federal government to bring in legislation to stop foreclosures — a problem President Obama took new steps to address last week. In an interview with TIME, Bair talks about the banking crisis, the coming trouble in commercial real estate and her push to end government bailouts of institutions considered too-big-to-fail.

TIME: We saw 140 bank failures in 2009; another 41 so far this year. Is the worst behind us?
Bair: I think we'll go above the 2009 level, but that bank failures will peak this year. The institutions by asset size might be a little smaller, but there will be more of them. But it's important that people understand that the number of bank failures is still a very small percentage of the overall number of insured institutions in the country — and obviously their insured deposits are protected.

How many banks are on your watch list right now?
There are about 700 right now, but most of these banks will not fail. Historically, about 23% of banks that go on the list actually fail. One of the reasons we put them on the troubled bank list is so that they can get some extra supervisory attention and...get nursed back to health.

Commercial real estate lenders have about $1.4 trillion in loans coming due in the next few years. Midsize and regional banks have big exposure. Worried?
It is true that the smaller banks have more commercial real estate as a percentage of their assets and they will tend to be more impacted by the troubles in that sector. But we've known about it for some time, and the overwhelming majority of banks, even those that have commercial real estate concentration, have built up good-sized loan loss reserves to absorb the losses. So I think most banks will weather this just fine.

You've pushed for better regulation of too-big-to-fail financial institutions. Does Senator Dodd's bill go far enough?
It's not a cure-all, but I think there are some really important provisions in terms of regulatory restructuring, more meaningful derivatives oversight, and giving regulators the tools to close large failing institutions so that their shareholders and creditors will have to take the losses — not the taxpayers. One issue in particular is the competitive disparities that are growing between large and small financial institutions because of ' too-big-to-fail' [issues]. Because the markets view the large institutions as entities that the government will bail out, they get more favorable funding sources under more favorable terms than the smaller institutions, where investors and creditors know their money is at risk. So I think if this legislation is not enacted, it will perpetuate this competitive disparity between large and small institutions, which is going to make the too-big-to-fail problem worse and not better.

I think derivatives are also still a major problem. This is still the Wild West — the derivatives market is very large and subject to very little oversight, and I think this needs to be fixed. I hope a comprehensive bill does get passed.

The Treasury has been unwinding investments it made in banks under the $700 billion TARP. Are the larger financial institutions on stable footing now?
I think that the worst of this financial crisis is over. But I think there are still some outstanding issues that could put us at peril again. For example, I think the true cost of these government interventions have not been tallied up yet. We have hundreds of billions of dollars in outstanding guaranteed debt in addition to our trillions of dollars of insurance exposure — I think we're managing this well, but it's still out there. Fannie and Freddie obviously have pretty much taken over the mortgage market and are guaranteeing a lot of mortgages right now. And then of course you have a lot of institutions that still have significant government ownership through the TARP investments so I don't think we're out of the woods yet, and I think it will be years before we know what the true cost will be.

You made a bid for Congress back in 1990, but your profile has risen significantly since then. Any political aspirations?
No, I have no aspirations to run for office and I'm going to serve out my term.