Banks to bail out the regulator?

It is interesting what Ms. Bair had to say about the need to bolster the FDIC (from WSJ):

The financial crisis has clobbered the FDIC’s deposit insurance fund, forcing the agency to impose a special assessment on the industry to rebuild the fund. Ninety-two banks have failed so far this year. The deposit insurance fund fell by $2.6 billion to $10.4 billion during the second quarter, after 24 banks went bust.

In a speech at Georgetown University’s McDonough School of Business, Ms. Bair strongly cautioned the Financial Accounting Standards Board, or FASB, against expanding market-to-market accounting rules to bank deposits and loans.

Currently, banks are required to write down certain securities to market values when they become impaired. FASB is proposing to extend that to other bank assets, such as loans and deposits.

Ms. Bair said the move would create more volatility for bank balance sheets, exacerbating the financial crisis, with no measurable improvement in transparency.

“Marking banking assets to market prices doesn’t make sense,” she said.

Ms. Bair argued that policy makers, after the extraordinary government interventions of the past year, need to work now to dispel assumptions that certain “too big to fail” companies will be bailed out. She said larger, riskier firms should face higher capital charges. She also repeated arguments for creating a process to wind down teetering nonbank financial firms similar to the FDIC’s system for resolving banks.

“The process is harsh. It is painful. But it works,” she said, by sending “a strong message that investors and creditors face losses when banks fail.”

She is arguing against rating and judging loans and assets against the risks that can come with them. I would argue that firms with dubious ability to back the assets put into banks serve as a nasty surprise package if the firm goes under: the ‘reliable’ money in the bank moves quickly out of the system and a bank can over extend itself if it DOESN’T put a risk on those putting assets into them. Loans and deposits should have a risk analysis done on them to help better understand the solvency and backing of each institution. While it would put some instability into the current market, it would see banking institutions tighten up on the level of risk they are willing to accept for such things.

Right until they run smack-dab against federal regulations telling them to TAKE risks for certain sectors for loans and deposits. We saw that with No Income No Job or Asset (NINJA) loans in the home mortgage arena which were pushed by regulators on institutions. Yet those are not good risks to take and should be judged as such on the books… and tie those risks right back to the regulations, the regulators and the laws that put them in place.

Which wouldn’t be too nice for the FDIC having to see exactly what sort of risks the federal government is forcing institutions to take… perhaps if we had fewer regulations telling these institutions who to lend to, and let them judge based on how risky such things were, we would have a better system. But that depends on independent experts to judge these things, not federal regulators with guidelines pre-set to tell them who is risky and who isn’t based on the political whims of Congress.

ajacksonian on September 22, 2009 at 2:00 PM