(Adds comment on systemic risk)
WASHINGTON, July 23 (Reuters) - The United States needs a resolution mechanism for unwinding systemically important institutions, the chairman of the U.S. Securities and Exchange Commission said on Thursday.
Currently, the nation has no system in place to unwind large nonbank financial institutions such as large insurer American International Group Inc AIG.N. The Obama administration has proposed creating such a system and is due to provide further details on Thursday.
“Structured correctly, a credible resolution regime could force market participants to realize the full costs of their decisions and help reduce the ‘too big to fail dilemma,’” SEC Chairman Mary Schapiro said at a Senate Banking Committee hearing.
The administration and Federal Deposit Insurance Corp have been pushing for a mechanism to unwind such companies after the government's ad hoc response to those that were on the verge of collapse, such as AIG and large investment banks Bear Stearns and Lehman Brothers LEHMQ.PK.
The government pumped billions of dollars into AIG, brokered a merger between Bear Stearns and JPMorgan Chase & Co JPM.N, and allowed Lehman to fail.
“Structured poorly, such a regime could strengthen market expectations of government support as a result fueling ‘too-big-to-fail’ risks,” Schapiro said.
The Senate Banking Committee is holding a hearing to examine ways to establish a framework for systemic risk regulation.
The administration wants the Federal Reserve to have real authority to oversee risks that could harm the wider economy and financial system, with advice from a council of regulators.
Schapiro is also pushing for a hybrid approach with a single systemic risk regulator. However, she is advocating for the council of regulators to have the authority to identify emerging risks and ability to establish rules for leverage and risk-based capital for systemically-important firms.
“The council would permit us to assess emerging risks from the vantage of a multidisciplinary group of financial experts with responsibilities that extend to different types of financial institutions, both large and small,” she said.
Schapiro said members of the council could include representatives from the Treasury Department, the FDIC, SEC, Commodity Futures Trading Commission and the Federal Reserve. (Reporting by Rachelle Younglai, editing by Gerald E. McCormick and Lisa Von Ahn)
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