WASHINGTON (Reuters) - Congress should eliminate any possibility of temporary bailouts in draft legislation that would give the government power to break up troubled, systemic financial firms, a top U.S. bank regulator said on Wednesday.
Sheila Bair, chairman of the Federal Deposit Insurance Corporation, also said large firms should pay fees for risky activities, such as proprietary trading and heavy involvement in over-the-counter derivatives and structured finance.
Those fees could fund the so-called resolution mechanism that would allow the FDIC to dismantle a large financial firm in an orderly way, and could discourage financial firms from getting too big and complex, she said.
"Financial organizations ... doing a lot of proprietary trading that's higher risk, they should pay a higher assessment," Bair said at the Reuters Washington summit.
Bair said the Obama administration's draft bill could be strengthened to eliminate the possibility of any "open bank" assistance, which would be another deterrent for growth.
"I think we need to make it clear it's a resolution mechanism, not an organized bailout mechanism," Bair said.
The administration plans to send a tougher draft bill to Congress in the coming days, but has not detailed the changes.
Bair has been a strong advocate for measures that could combat the moral hazard of "too big to fail." She said financial firms and their investors and creditors cannot make judgments based on the belief that government will step in to insulate them from their mistakes.
The resolution regime laid out in the administration's original proposal softened the prospect that a large firm could be subject to a government-driven dismantling if it runs into severe trouble.
That proposal would have given Treasury the power to decide whether to first try to stabilize a large failing firm before appointing the Federal Deposit Insurance Corp as a conservator to unwind the institution.
"On an individual institution basis, I do not think you should make capital investments, provide credit support, do any of that," she said. "I think if a bank gets in trouble or any large financial organization gets in trouble because of its own mismanagement, I believe it should be put in to receivership."
During the recent financial crisis, the government has extended hundreds of billions of dollars in taxpayer funds to a handful of institutions on the brink of failures, including American International Group (AIG.N: Quote, Profile, Research, Stock Buzz) and Citigroup (C.N: Quote, Profile, Research, Stock Buzz).
Watchdogs for the government's Troubled Asset Relief Program (TARP) have said it is unlikely that taxpayers will fully recoup their investment.
Bair said the tougher resolution mechanism should, however, allow the government to provide broad assistance if financial markets are in turmoil. That exception would allow for programs like the FDIC's debt-guarantee program for banks, which is currently be wound down.
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