October 29, 2008 / 2:54 PM / 11 years ago

Bair says FDIC's powers could extend to insurers

WASHINGTON (Reuters) - The Federal Deposit Insurance Corp’s powers could be expanded if Congress decides to shift insurance companies from state regulation to federal regulation, FDIC Chairman Sheila Bair said on Wednesday.

The FDIC could start providing guarantees for insurance companies, much like it already guarantees the deposits of most U.S. banks, if the insurance industry comes under federal regulation, Bair said. Insurance companies are currently regulated by individual states.

“Our authorities would be expanded,” Bair said at the annual conference of the International Association of Deposit Insurers.

Bair also said the FDIC is “actively engaged” in discussions with the Bush administration about a new federal program to provide economic incentives for lenders to modify distressed home loans into sustainable long-term loans, in an attempt to stem the wave of foreclosures.

She said last week that the $700 billion financial rescue plan gives the Treasury Department the power to use loan guarantees and credit enhancements to facilitate loan modifications and prevent avoidable foreclosures.

“Such a framework is needed to modify loans on a scale large enough to have a major impact” and to get ahead of the curve on foreclosures, Bair said.

Bair also told the conference that despite all the tools regulators have been using, she cannot yet say the credit crisis has reached a bottom.

“I would like to say we’ve turned a corner ... but at this point I still don’t feel comfortable making that prediction,” she said.

So far this year 16 banks have failed, including Washington Mutual, the largest bank failure in U.S. history. In 2007, three U.S. banks failed.

Bair said there will be more bank failures but “it will be in a range we can handle.”

She said the FDIC has not yet tapped into taxpayer funds to help cover the costs of failed banks and hopes that it will not need to do so.

Looking to the FDIC’s future, Bair said the agency’s role will change, especially if insurance companies become federally regulated.

Treasury Secretary Henry Paulson, in his blueprint for regulatory reform released earlier this year, called for the creation of an optional federal charter for insurance companies. The plan also called for a new Office of National Insurance to regulate them.

Insurance companies have been under increased pressure after large losses on mortgage debt guarantees and subsequent rating cuts.

Giant insurer American International Group (AIG.N) was bailed out by the federal government last month as it was veering toward bankruptcy after mortgage-linked investments cost it $25 billion over three quarters.

Bair said a federal mechanism for regulating insurance companies “would presumably be combined with some sort of guarantees.” The FDIC would be the likely institution to provide that insurance, she said.

Reporting by Karey Wutkowski; Editing by Brian Moss and John Wallace

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