July 23 (Bloomberg) -- Federal Deposit Insurance Corp. Chairman Sheila Bair urged U.S. lawmakers to impose fees on the nation’s largest financial firms to keep the government from having to prop up companies deemed too large to fail.

Congress should create an industry-supported Financial Company Resolution Fund to provide working capital and cover unanticipated losses when government steps in to unwind a failed firm, Bair said today in testimony at the Senate Banking Committee.

The U.S. should impose “assessments on large or complex institutions that recognize their potential risks to the financial system,” Bair said. “This system also could provide an economic incentive for an institution not to grow too large.”

Bair’s proposal is aimed at preventing the government from having to bail out or arrange an acquisition for a firm whose failure would disrupt the financial system. In the past two years, the U.S. has rescued, taken over or helped sell Bear Stearns Cos., Merrill Lynch & Co., American International Group Inc., IndyMac Bancorp Inc., Fannie Mae and Freddie Mac.

Bair said the proposed reserve would be similar to the FDIC deposit insurance fund, which backs consumer accounts at U.S. banks that pay fees to support the fund.

“In a properly functioning market economy there will be winners and losers, and when firms -- through their own mismanagement and excessive risk taking -- are no longer viable, they should fail,” Bair said.

She urged creating a mechanism to wind down “large, systemically important financial firms” with no cost to taxpayers similar to the system in place at the FDIC for shutting failed commercial banks and thrifts.

‘Costly, Ad Hoc’

“Without a new comprehensive resolution regime, we will be forced to repeat the costly, ad hoc responses of the last year,” Bair said.

Bair joined Securities and Exchange Commission Chairman Mary Schapiro and Fed Governor Daniel Tarullo in discussing an Obama administration proposal to give the Federal Reserve authority over firms that pose a systemic risk to the economy.

Schapiro said a council of agencies with the Treasury Department, the SEC and the FDIC should oversee “systemically important institutions.” Bair endorsed the idea.

The council should “prevent the creation” of companies deemed too large to fail, rather than just regulating such companies, Schapiro said. It should have authority to identify firms it deems systemically risky, Schapiro said.

‘Large, Diverse’

“Insufficient attention has been paid to the risks posed by institutions whose businesses are so large and diverse that they have become, for all intents and purposes, unmanageable,” Schapiro said.

Tarullo said giving the Fed the authority “would be an incremental and natural extension” of the central bank’s current role.

“I hope people are not expecting that anything that the Fed, the SEC, the FDIC or anybody else does is going to eliminate all potential for systemic risk,” Tarullo said.

Senators Christopher Dodd and Richard Shelby, leaders of the banking panel, opposed giving the Fed new powers.

“The Fed hasn’t done a perfect job with the responsibilities it already has,” said Dodd, the chairman and a Connecticut Democrat. “This new authority could compromise the independence the Fed needs to carry out effective monetary policy.”

Shelby, the panel’s leading Republican, said the power would make the Fed “a regulator giant of unprecedented size and scope,” and Congress “should consider every possible alternative to the Fed as the systemic-risk regulator.”

To contact the reporters on this story: Alison Vekshin in Washington at avekshin@bloomberg.net. Jesse Westbrook in Washington at jwestbrook1@bloomberg.net.

Last Updated: July 23, 2009 10:30 EDT