US investment banks need insolvency mechanism-FDIC

By John Poirier

WASHINGTON, May 16 (Reuters) - If another troubled U.S. investment bank spirals toward insolvency, the federal government should have in place a mechanism to shut it down, the head of the Federal Deposit Insurance Corp said on Friday.

Some of the existing regulatory framework for commercial banks should also apply to investment banks, such as similar leverage standards, increased supervision, and corrective actions for undercapitalized institutions, said FDIC Chairman Sheila Bair.

"There should be a mechanism for the government to close the bank down in an orderly way," Bair said at a Brookings Institution event where the think tank released recommendations to improve regulation of the U.S. financial services industry.

"Trying to homogenize standards of leverage would be extremely helpful," Bair said. "There are some parts of the banking regulatory framework that could very well be applied to investment banks."

The March collapse of Bear Stearns Cos Inc BSC.N and its emergency bail-out by the Federal Reserve has prompted lawmakers and regulators to take a closer look at the government's oversight of investment banks.

The Securities and Exchange Commission currently monitors investment banks Morgan Stanley (MS.N: Quote, Profile, Research, Stock Buzz), Lehman Brothers (LEH.N: Quote, Profile, Research, Stock Buzz), Merrill Lynch & Co Inc (MER.N: Quote, Profile, Research, Stock Buzz), Goldman Sachs Group (GS.N: Quote, Profile, Research, Stock Buzz) and Bear Stearns as part of its consolidated supervised entities program.

SEC Chairman Christopher Cox said earlier this month that the agency will require more disclosure of capital and liquidity of the investment banks that it supervises. The agency is also working with the Federal Reserve to lay out how the two entities will work together to oversee the investment banks.

The Brookings Institution recommended on Friday that the Fed be given authority to create a bridge bank to take control of a troubled investment bank that may be near bankruptcy. That would give regulators time to determine a least-cost solution and whether a piecemeal sale of the institution is necessary.