Sheila Bair was a key player in the response to the last financial crisis. Here’s why she’s worried the coronavirus crisis could turn into another financial calamity.

Sheila Bair — Former chair of the Federal Deposit Insurance Corporation

Sheila Bair is worried that the current economic and health crisis will turn into a financial calamity.
Bair, who was a key player in the government’s response to the financial crisis a decade ago as the head of the Federal Deposit Insurance Corporation, is concerned that regulators are focusing on the wrong things.
Regulators, at the urging of the big banks, are moving to loosen capital requirements for financial institutions at the same time that the banks ought to be shoring up their balance sheets to protect themselves from a potential wave of corporate debt defaults, she said.
Corporate debt is at record levels and huge chunks of it are held by US banks.
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Sheila Bair is intimately familiar with what a financial crisis looks like and how devastating it can be.

So when she says she’s worried that we may be heading toward one, it’s probably a good idea to pay attention.

Bair, who was a key player in the federal government’s response to the financial crisis a decade ago, sees plenty of danger signs of another such calamity, much of it in the form of corporate debt and the collateralized loan obligations that debt gets sliced and diced and reassembled into. She also worries that the big banks are pushing hard to loosen capital requirements right now — and regulators are accommodating them.

“I think the regulators are focusing on the wrong things,” Bair told Business Insider in an interview Tuesday. “My worst fear,” she continued, “is that what is now a health and economic crisis turns into financial crisis.
And that’s what the regulators should be focusing on.”

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Bair headed up the Federal Deposit Insurance Corporation from 2006 to 2011. While there, she was part of the small group of policymakers that were trying to respond to the emerging crisis. Her job was to oversee the takeover and resolution of the numerous FDIC-backed banks that failed during that period. She also tried and failed to persuade then Treasury Secretary Tim Geithner to use a similar process to deal with the biggest financial institutions at the time, the ones that were later dubbed “too big to fail.”

It’s perhaps no surprise then that she’s again worried about the health of the banks.

Banks are pushing for looser capital requirements

Part of what concerns her is that the big banks are using the pandemic to persuade lawmakers and regulators to address one of their pet peeves: the amount of capital they have to keep on hand. In the wake of the Great Recession, in an effort to prevent another financial crisis, policymakers required banks of all stripes to increase the amount of capital they had on hand as proportion of their total assets, which include loans, investments, and real-estate holdings. Those institutions have been pressing ever since to lighten those requirements, claiming in part that the rules restrict their ability to make loans.

This spring the Federal Reserve announced new regulations that temporarily allow big banks to ignore certain assets when calculating the …read more

Source:: Businessinsider – Finance


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