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FDIC May Borrow from Treasury: Sheila Bair

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A wave of bank failures in 2009 has pressured the Federal Deposit Insurance Corp.'s (FDIC) deposit insurance fund, with regulators shuting down another three banks just one week ago, bringing the running total to 92 failures so far in 2009. Last week’s failures will cost the federal deposit insurance fund an estimated $2.02bn. It's only the latest round of costly failures that have brought industry players to question the overall impact to the FDIC's insurance fund. FDIC chairman Sheila Bair on Friday answered some of those calls, indicating in a post-speech question-and-answer session the agency may consider borrowing from the US Treasury Department to help replenish its insurance fund. In the speech, Bair noted the need for a way of closing large financial companies without inflicting collateral damage on the economy, although she acknowledged the importance of allowing certain financial firms to shut down. "[W]hen firms, through their own mismanagement and excessive risk-taking, are no longer viable, they ought to fail," Bair said. "Preventing companies from failing ultimately distorts market discipline, including the incentive to monitor competing firms and to allocate resources to the most efficient ones.?" Bair warned on the systemic significance of firms that grow to the point of being seen as "too big to fail." "[W]e need an orderly and highly credible mechanism that's akin to the process we use to resolve FDIC-insured banks," she said. "When the FDIC closes a bank, what typically happens is shareholders are wiped out ... creditors take a substantial haircut, management is replaced, and the remaining assets of the failed institution are sold off." She called for a new resolution regime that would focus on maintaining a failed institution's liquidity and key activities so it can be resolved without the "near panic" seen year ago after the collapse of Lehman Brothers. Losses should be borne by the stockholders and bondholders of the holding company, and senior managers should be replaced. In some cases, Bair said, marking banking assets to market prices does not make sense. A bank that holds a loan or a similar banking asset for the long-term should not have to mark the asset to market values that may vary widely over time. "Extending [mark-to-market] accounting to all banking assets takes a good approach for market-based assets, like securities, but extends it to areas where it doesn't accurately reflect the business of banking," Bair said. The American Banker Association (ABA) also voiced its concern recently for the apparent encouragement of mark-to-market in both Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) accountancy changes. Marking assets to market, ABA argued, promotes procyclicality in pulling values down. In other words, asset values are pulled down further by marking them to assets whose values have declined. As asset values declined and loan performance worsened, financial firms and banks exposed to heavy loan losses face the risk of being shuttered. The FDIC has several options to consider as it looks to replenish the insurance fund after nearly 100 bank failures this year. There has been a general shift of mindset that the FDIC should consider taking government funds, Bair said at a question-and-answer session following the speech Friday. "We are considering all options, including borrowing from Treasury," Bair said, adding the board will meet before the end of the month and should soon issue some requests for comment on the subject. Senator Carl Levin (D-Mich.) this week urged FDIC to take advantage of borrowing authority included a provision in the Helping Families Save Their Homes Act. He noted the Act authorizes the FDIC to borrow up to $100bn from the Treasury if additional funds are needed to replenish the insurance fund. He urged the FDIC to choose borrowing from the Treasury over increasing fees charged to all banking firms. "While most community lenders were not caught up in the exotic excesses of their larger peers, the ongoing economic crisis has still had a tremendous impact on them," he told Bair in a letter this week. "Adding yet another major financial obligation during this crisis could further deplete the capital of these small financial institutions, making it difficult for them to extend the credit needed to turn our economy around." Write to Diana Golobay.

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