(Corrects day to Wednesday in 1st paragraph)
* Bair defends Dodd-Frank financial reform law
* She argues it will help smaller banks
By Dave Clarke
WASHINGTON, March 16 (Reuters) - U.S. bank regulator Sheila Bair told a group of bankers on Wednesday that for their own good they need to embrace industry changes and the new financial reform law -- a message that drew guffaws and protests.
The Federal Deposit Insurance Corp chairman's speech to an American Bankers Association conference was followed by a spirited back and forth with bankers who were in Washington, in part, to lobby lawmakers to roll back or soften the Dodd-Frank law enacted in July.
Bair's message to the group was decidedly different than what many in attendance were in Washington to deliver -- that new regulations could sink their businesses.
"The biggest long-term risk to the success of the banking industry will be its failure to support reforms needed to ensure long-term stability in our financial markets and our economy," she told the group. "The American people have suffered enormous economic losses as the result of this financial crisis."
Later, after calling for a show of hands of the community bankers present in the expansive hotel ballroom, Bair expressed dismay that smaller banks were so critical of the new law.
She argued many of the new policies are aimed at large institutions and that smaller banks will benefit from the changes such as paying less into the insurance fund that covers the cost of bank failures.
Her assertion drew a guffaw from the audience that led Bair to ask incredulously if they wanted Dodd-Frank repealed?
An affirmative applause was the response.
"That's amazing, note to Congress," Bair said.
CHAMPION OF THE LITTLE GUYS
Bair argued that throughout her five-year term at the FDIC that ends in June she has been a champion of smaller banks.
She has consistently praised small banks for being better than their larger peers at extending loans, especially during the recession. And she has fought to end the perception that big banks are "too big to fail," saying that perception drives up smaller banks' borrowing costs.
In recent weeks, she noted, the FDIC advocated for changes to a crackdown on fees banks can charge merchants when debit cards are used. She said the current Federal Reserve proposal could harm small banks.
"I think my tenure at the FDIC has shown that I am not the enemy of community banks, quite the opposite," she said.
Several audience members complained about recent guidance from the FDIC that attempts to crack down on overdraft fees banks can charge customers.
Bair responded by saying the industry needs to stop focusing only on what it does not like and try to work more with regulators on changes that could benefit the industry.
"Is there ever times when you can acknowledge what regulators have done to help the stability of the industry?" she asked. "What the FDIC has done? What, frankly, Dodd-Frank did? I think there needs to be some acknowledgment of that." (Reporting by Dave Clarke, Editing by Dave Zimmerman)