November 24, 2009 / 6:19 PM / 8 years ago

US FDIC's Bair cautions on big bank break-up power

* Bair: proposal to break up big banks “well-intentioned”

* Warns Congress must be mindful of bank safety, soundness

By Karey Wutkowski

WASHINGTON, Nov 24 (Reuters) - A top U.S. bank regulator on Tuesday said lawmakers need to be careful about moving forward with a proposal that could break up the largest financial institutions, while also voicing support for its objective.

Sheila Bair, chairman of the Federal Deposit Insurance Corp, said the proposal from Democratic Representative Paul Kanjorski is “a well-intentioned amendment.”

Kanjorski, whose amendment got approved by a House of Representatives committee last week as part of a bigger financial reform bill, has proposed giving the government power to break up financial firms that could threaten financial stability, even if they appear healthy.

“We share the same goal of ending ‘too big to fail’ and making sure that institutions cannot imperil the broader economy,” Bair told reporters during the FDIC’s quarterly bank earnings briefing.

But she also cautioned, “We need to be careful. I think there is a safety and soundness issue.”

Bair has been a vocal advocate of ending notions that some financial institutions are too big to fail, and that the government will bail them out if they become insolvent.

Her opinions are influential with lawmakers, who have lauded her for issuing early warnings about subprime loans and for pushing aggressively for mortgage modifications.

She stopped short of giving outright support to Kanjorski’s amendment. International regulators are looking at similar proposals, and European Union officials have said they will turn the spotlight on 28 European banks bailed out by governments for possible mandated divestitures.

The Obama administration and congressional Democrats want a new way to handle failing firms. The goal is to prevent another debacle like last year‘s, when Lehman Brothers collapsed, triggering a credit crisis, and taxpayers bailed out AIG (AIG.N), Citigroup (C.N), Bank of America (BAC.N) and others.

Bair has called for economic disincentives, such as higher capital requirements and fees paid into a resolution fund to dismantle failing financial giants. The idea is that those costs would discourage firms from getting too big to fail.

Kanjorski’s amendment is part of a massive financial overhaul plan from Democrats that also calls for a new consumer agency to police financial products, enhanced oversight of derivatives, and a controversial measure to open the Federal Reserve’s monetary policy decisions to government audits.

A full House vote on the bill is not expected until the second week of December at the earliest. Independent Senator Bernie Sanders has proposed similar bank break up legislation, but that bill has not attracted wide support in the Senate. (Reporting by Karey Wutkowski; Editing by Tim Dobbyn) ((E-mail:karey.wutkowski@thomsonreuters.com +1 202 898 8374))

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