FDIC working to bolster fund for more bank failures

WASHINGTON (Reuters) - Banking regulators are working aggressively to implement higher deposit insurance limits and to ensure that there will be sufficient reserves to cover losses from more bank failures, the chairman of the Federal Deposit Insurance Corp said on Monday.

"We're working hard to assure that our industry-funded reserves will be sufficient to cover projected losses from more bank failures," Sheila Bair said in remarks to a business economics conference. "The fund has decreased as a result of recent bank failures."

Bair said legislation passed last week that raised the deposit insurance limit to $250,000 per account from $100,000 "does not solve all of the problems in the industry" but will give depositors critically important confidence in the safety of their money.

The temporary increase in deposit insurance was part of a $700 billion government plan to purchase soured mortgage-backed assets and unfreeze credit markets.

Regulators will carefully watch for any risks associated with raising the deposit insurance limits, especially if the guarantee encourages banks to engage in more risky lending, Bair said.

Bair also said the FDIC will on Tuesday consider an increase in insurance premiums that banks must pay, bolstering the deposit insurance fund which stands at some $45 billion.

The premium proposal shifts a greater share of any increase to banks that engage in more risky practices, such as accepting short-term "broker deposits."

Bair reiterated that the deposit insurance guarantee is absolute and that the FDIC has authority to borrow from the U.S. Treasury Department if it needs to.

She also laid out principles to guide mortgage finance reform. She said consumers must be protected from loans that are not affordable or too complex. Further, she said financial institutions need to restrain their leverage and not seek higher returns without proper regard for the associated risks.

Bair said the incentive structure needs to be revised so that mortgage originators and underwriters are not rewarded for actions that don't serve the long-term interests of borrowers and investors.

Lastly, she said banks need to not take liquidity for granted.

"At the end of the day, liquidity is only as stable as our institutional practices, and the public's confidence in those practices," Bair said.

She said tougher regulation is "absolutely needed" to enact these principles. "We especially need to plug the gaps that allowed regulatory arbitrage, which is one of the root causes of the explosion in subprime lending that triggered the housing meltdown," she said.

But she stressed that the financial system does not necessarily need more regulation, just smarter regulation.

(Reporting by Karey Wutkowski, editing by Brad Dorfman)