–Very Positive Signs in Banking Sector Reflect Better Econ
–Would Support Broad Ban on Speculative Naked CDS

By Yali N’Diaye

WASHINGTON (MNI) – While developments in the euro zone must be
monitored carefully in the short term, the exposure of the U.S. banking
system is not significant, Federal Deposit Insurance Corp. Chair Sheila
Bair said Thursday, also noting continued signs of improvement in the
U.S. economy and banking sector.

“The direct exposure for the U.S. banking system is not
significant,” she said, referring to the euro zone sovereign risk.

But, “Longer term, we perhaps should be taking a lesson from this
to understand it’s important for us to get our own fiscal house in order
as well” before it reaches the point Greece is at right now, she said in
an interview on C-Span, where she also took questions from the public.

Eventually, she said she expects Europe to work out the issue that
started with Greece, which “is troubling” but “manageable.”

Ultimately Europe will “take all the steps that are needed to deal
with it,” Bair said, although, “In the short term, it’s something we
need to watch carefully.”

On this side of the Atlantic, she noted the U.S. economy and its
banking sector are showing positive signs of recovery.

“There are a lot of very positive signs, reflective of an overall
improving economy.”

She noted small banks are able to raise new capital, more bidders
appear when banks fails and the FDIC’s pricing is getting better.

Bair warned against a one size fits all approach for derivatives in
particular in the financial regulatory reform process.

While tighter legislation is needed for the derivatives market and
there is a case for a broad ban on speculative naked credit default
swaps, banks should still have the possibility to use derivatives to
hedge positions, she said.

In particular, they should be able to use customized
over-the-counter derivatives when needed, although standardized
derivatives should be traded on exchanges and be cleared through central
clearinghouses.

“Not all derivatives are bad,” she said, adding that interest rate
derivatives help banks manage their interest rate risks, which is what
regulators have been encouraging banks to do.

A lot of the anti-derivatives sentiment is “fully right,” she said,
adding she would support a broad ban on “speculative naked CDS trading,”
no matter who’s doing it.

However, banks “do need the capability to be able to hedge their
own exposures.”

So the overall derivatives legislation should be careful not to
harm legitimate trades.

Bair also said the issue Fannie Mae and Freddie Mac needs to be
tackled.

Commenting on an amendment that was voted Wednesday by the Senate,
she welcomed the authority it gives to the FDIC to break down large
institutions and sell them off the same way it happens for small insured
institutions.

The Senate Wednesday approved on a 93 to 5 vote on an amendment
drafted by Senate Banking Committee Chairman Chris Dodd and Sen. Richard
Shelby, the ranking Republican on the Banking panel.

The Dodd-Shelby amendment would strip the underlying bill of a
provision creating a $50 billion resolution fund that would have covered
the costs of a major financial collapse.

Under the amendment, the FDIC would have the ability to liquidate
large losses and could tap a credit line from the Treasury Department to
cover any costs. The FDIC could recover its losses by selling off the
assets of the failed firm.

The issue, she said, was whether the resolution facility would be
funded upfront from the industry — her preference — or through
borrowing from Treasury.

The key is that “I think it will end too big to fail,” she
continued, with some rating agencies already indicate it will result in
some downgrades of large institutions.

And should the legislation pass, which she expects, the FDIC “will
need to build up some expertise on non-bank financial entities,” Bair
said.

Bair was also asked to comment on whether the Government
Accountability Office should audit the Federal Reserve, which Fed
Chairman Ban Bernanke opposes.

While declining to take a direct position on the issue, Bair noted,
“Transparency is always a good thing and having an extra pair of eyes
looking over your shoulders who can make sure you’re doing everything
the best as you can is not a bad thing.”

The GAO “keep us on our toes,” she said. “This works well for us.”

Bair also repeated her view on the securitization market, which
should be revived on sounder principles, without the “perverse economic
incentives” that contributed to the crisis.

“The securitization market can be a good thing if it’s properly
structured,” she said, as the FDIC is currently working on a rulemaking
on the treatment of securitizations from failed banks under
conservatorship or receivership.

In particular, the FDIC is working on making sure that banks retain
risk when doing securitization, she said.

** Market News International Washington Bureau: 202-371-2121 **

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