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Banks

UPDATE 2-US govt won't run large firm for extended time-Bair

(Adds Bair comments on resolution process)

WASHINGTON, March 2 (Reuters) - The U.S. government will not likely operate a large financial institution for an extended period of time, the head of the Federal Deposit Insurance Corp said on Monday.

Chairman Sheila Bair also said she would be surprised if the FDIC has to step in as conservator or receiver of a large, systemically important institution. But she said U.S. regulators are committed to preserving the viability of systemic financial firms.

“This will be done through capital injections, if needed, and the supervisory process,” Bair said in prepared remarks to the annual conference of the Institute of International Bankers.

Her remarks on Monday come on the heels of a fresh $30 billion injection for giant insurer American International Group Inc, which already received $150 billion in government aid last year and stands to receive more if economic conditions further deteriorate.

Bair also said financial firms will remain under pressure for the next few quarters. The FDIC reported last week that the U.S. banking industry lost a combined $26.2 billion in the fourth quarter of 2008, its first quarterly loss since 1990.

The agency also announced it had set aside $22 billion for expected payouts by the FDIC deposit insurance fund for bank failures in 2009.

“There will be more challenges ahead before recovery takes hold,” Bair said. “There are no quick fixes.”

However, Bair said some policy tweaks are needed quickly so regulators can more effectively deal with failing financial firms and head off future crises.

“I strongly believe that global leverage capital requirements are sorely needed. And they should apply for all systemically important financial firms, regardless of charter,” Bair said.

She said Basel II capital standards -- which are starting to be implemented around the world but are only in very early stages in the United States -- are problematic. She said she has “grave concerns” about the latitude they give banks regarding their capital levels.

The so-called Basel II advanced approach tries to improve upon Basel I by allowing the largest financial firms to rely more on internal risk models to determine adequate capital levels.

Bair said an international Basel committee is trying to improve Basel II but that “they are unlikely to offset what we see as a capital-lowering bias that is essentially baked into the advanced approach.”

DEALING WITH FAILURES

Bair also sounded alarms over the lack of a clear process for handling the failure of a large financial holding company with multiple affiliates.

Although the U.S. government has a process to deal with large banks, it does not have a similar resolution process for financial conglomerates, she said.

The FDIC has long had a history of taking over insolvent banks and selling off their assets, but Bair said the agency does not have the authority or the funding to close down a financial holding company.

“Our assessment authority only extends to insured banks,” Bair said. “This is something we are trying to get fixed.”

She also touched on fixes that are needed for the resolution of a failed financial firm that is regulated by more than one country.

Many countries’ laws are inadequate to deal with a complex cross-border financial firm, and as a result, countries are likely to protect their own national interest, regardless of the global risk.

“We clearly need new laws for cross-border financial groups,” Bair said. (Reporting by Karey Wutkowski; Editing by Neil Stempleman, Gary Hill and Matthew Lewis)

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