Bair Looks Beyond Stress Tests, Seeks End to ‘Too Big to Fail’

(Bloomberg) -- Federal Deposit Insurance Corp. Chairman Sheila Bair, looking beyond stress tests that will determine the health of the top 19 U.S. banks, said her agency should have the authority to close even the biggest lenders.

The “too-big-to-fail concept” should be “tossed into the dustbin,” and the FDIC should have the power to close “systemically important” financial firms, Bair said in a New York speech yesterday. “Given our many years of experience resolving banks and closing them, we’re well-suited to run a new resolution program,” she said.

Analysts are recalibrating their estimates of the results of the federal bank examinations after the government announced the test methodology last week. Lenders were given preliminary results on April 24 and have time to discuss them with regulators before the full readings are released on May 4.

“If the FDIC had the authority to close down non-banks as they’ve been able to close down banks, the cost to the taxpayer would have been much less,” said Sung Won-Sohn, former chief economist at Wells Fargo & Co. who is now a professor of economics and finance at California State University Channel Islands in Camarillo. “With the authority she’s talking about, the government could take preemptive action.”

U.S. regulators have provided more than $90 billion to Citigroup Inc. and Bank of America Corp., given more than $180 billion in loans to American International Group Inc. and established debt-guarantee programs. The FDIC wound down 29 failed banks and thrifts this year.

‘Unnecessary’

Analysts including Richard Bove of Rochdale Securities say the stress tests aren’t useful.

“This test still strikes me as being unnecessary, dangerous, and poorly conceived,” Bove wrote in an April 25 note to clients. “My fear is that this program will not only fail to raise more capital, but it will force banks to contract.”

Regions Financial Corp., the Alabama bank that has accepted $3.5 billion in U.S. assistance, declined 12 percent in New York trading yesterday as analysts said regulators may push the company to raise more capital to offset mounting losses.

The bank “probably has been told to raise additional equity capital with $7 billion to $8 billion of projected 2009- 2010 losses vs. $4 billion to $5 billion of pretax, pre- provision income,” analyst Jeff Davis of Howe Barnes Hoefer & Arnett Inc. said in a report yesterday.

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