FDIC's Bair says big firms "can and will fail"

WASHINGTON (Reuters) - Market participants should clearly get the message that large financial institutions "can and will fail" under the Obama administration's regulatory reform proposal, top U.S. bank regulator Sheila Bair said on Wednesday.

Bair, the chairman of the Federal Deposit Insurance Corp, said addressing the idea of "too big to fail" is "of primary importance."

"Market participants should understand that large institutions can and will fail and that an effective resolution mechanism will be uniformly applied to institutions in a fair, transparent and consistent manner," Bair said in a statement.

President Barack Obama's sweeping plan to reform financial regulation, which was unveiled on Wednesday, included a proposal to make the FDIC the resolution authority responsible for unwinding troubled financial firms.

Bair has told lawmakers that an effective resolution regime could discourage banks from growing too large and complex because they would no longer view government bailouts as a backstop.

But the resolution regime laid out in the administration's proposal softens the prospect that a large firm could be subject to a government-driven dismantling if it runs into severe trouble. The proposal gives Treasury the power to decide whether to first try to stabilize a failing large, interconnected firm before appointing the FDIC as a conservator to unwind the institution.

If Treasury decides to stabilize a large firm, the government would have the power to make loans, provide guarantees, or make equity investments in the institution.

Bair emphasized in her statement that market players should not believe they are exempt from a resolution regime.

The new resolution authority would build off the FDIC's existing model for resolving failed banks. The agency currently does not have the power to unwind bank holding companies or other large non-banks, and such new authority would require legislation.

U.S. officials have said the lack of such authority has driven policy decisions, such as committing $180 billion in bailouts to troubled insurance giant AIG.

Bair commended the Obama administration's plan in her statement, saying it takes an "inclusive approach to policy development."

The plan includes the biggest financial reforms since the 1930s and includes putting the Federal Reserve in charge of monitoring "systemic risk" to the economy and the creation of an independent agency to control consumer financial products.

Bair also said regulators must maintain a focus on assuring strong capital requirements for banks and their holding companies.

"As the ultimate insurer of over $6 trillion in deposits, the FDIC's emphasis on capital has proven to be a crucial component in monitoring and preventing systemic risks," Bair said.

(Reporting by Karey Wutkowski; Editing by Brian Moss and Matthew Lewis)