Systemic firms won't be "too big to fail": Bair

CHICAGO (Reuters) - Financial firms that the U.S. government deems as "systemic" will not be "too big to fail," bank regulator Sheila Bair said on Thursday.

Bair, pushing back against critics who say the systemic designation is simply a government guarantee, said a major criteria for the designation is whether the government can liquidate them if they start to fail.

Under the new Dodd-Frank financial oversight law the government can designate non-bank financial firms as being systemically important financial institutions, or SIFIs, because their failure could roil markets and damage the economy.

These firms, along with banks with more than $50 billion in assets, will be subject to more regulatory scrutiny by the Federal Reserve and will fall under the Federal Deposit Insurance Corp's new liquidation authority.

FDIC Chairman Bair said there is a misconception that policymakers don't have the means or the will to close down the SIFIs in a crisis.

"Ultimately, the 'resolvability' of an institution should determine if it is designated as a SIFI," Bair said in remarks prepared for delivery at a banking conference sponsored by the Chicago Federal Reserve Bank.

"Upholding this standard will be essential if we are to avoid the 'deathbed designation' of SIFIs that would put the resolution authority in the worst possible position in a crisis."

Bair acknowledged that a sweet spot for financial firms will be falling just short of SIFI status.

She said that reshuffling of competitive advantages makes it critical for the Financial Stability Oversight Council to move quickly on developing hard criteria for the SIFI designation process.

"We need to be able to gather information on a broad range of potential SIFIs in order to develop a sense of the difficulties that might arise in resolving them," Bair said.

(Reporting by Ann Saphir; Editing by Karey Wutkowski and Tim Dobbyn)