March 26, 2009 / 5:04 PM / 10 years ago

UPDATE 1-U.S. bank group opposes plan to expand FDIC powers

WASHINGTON, March 26 (Reuters) - A top U.S. bank industry group said on Thursday it opposes a Treasury Department proposal to give the Federal Deposit Insurance Corp the power the wind down troubled non-bank financial firms.

The American Bankers Association also raised concerns about an expansion of Federal Reserve powers, saying nothing should be done to detract from the Fed’s monetary policy responsibilities.

“With regard to the resolution mechanism, ABA has serious concerns with formally giving the FDIC this power. It is dangerous to risk confusing the mission of the FDIC and detracting from the power of its image in the minds of depositors,” ABA President Edward Yingling said in a statement.

He said the FDIC’s experience with resolving failed banks should be tapped, but the actual resolution power be located elsewhere.

The FDIC currently has the power to seize depository banks, but does not have similar authority for non-banks, including bank holding companies such as Citigroup Inc (C.N), or insurers such as American International Group Inc (AIG.N).

Legislation was proposed this week that would give the government the power to seize a troubled non-bank financial firm whose outright failure could do broad damage to the economy.

The legislation gives the FDIC the power to make loans to a troubled firm while keeping it open, buy a stake in the firm, assume obligations, take a lien on the firm’s assets, sell off the firm’s assets, or seize the whole firm.

The ABA said the FDIC’s “rock-solid reputation” for standing behind bank deposits could be lost easily if it gets these extra powers.

“There is already too much confusion among average investors about whether various types of non-bank investment and savings vehicles are insured and stretching the FDIC’s mission will compound that,” Yingling said.

He also said it is not clear how the FDIC’s role with non- banking firms would be funded and that it would be “completely unfair” to pull resources from the banking industry to resolve non-banks.

The legislation would appropriate to the FDIC “such sums as are necessary, without fiscal year limitation” to fund its new authority, according to language from the proposal.

It also says the FDIC would recover the taxpayer money it spends when resolving non-banks through one or more “emergency special assessments on financial companies.”

It is not clear which financial companies could be subjected to the special assessments.

The FDIC has already asked Congress for power to charge systemic risk assessments for financial firms of all types, not just banks. (Reporting by Karey Wutkowski; Editing by Andre Grenon)

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