FDIC’s Bair Says Banks Have ‘Plenty of Capacity’ to Lend

Federal Deposit Insurance Corp. Chairman Sheila Bair said banks will be able to meet higher capital standards with retained earnings and have “plenty of capacity to lend.”

“The fact is that the capital requirements U.S. banks now face are mostly the same as those that were in existence before the crisis,” Bair said today in a speech at the National Press Club in Washington. “The reason banks are not lending more is a combination of risk-aversion on their part and reduced borrower demand. They have plenty of capacity to lend.”

Bair, who supports international efforts to impose tougher capital requirements on systemically important financial firms, said resistance to the proposed changes reflect what she has called “amnesia” amid recovery from the financial crisis.

“Some banking industry representatives are claiming that higher capital requirements will raise the cost of credit and could derail the economic expansion,” Bair said. “This is a terrific example of the sort of static, short-term thinking that got us into this mess in the first place.”

“There is a lot of recent research that shows higher capital requirements, in the range that we are talking about, will have a very modest effect,” she said.

Risk Retention

Bair also backs a Dodd-Frank Act mandate that issuers of mortgage-backed securities retain 5 percent of the credit risk from pooled loans sold to investors.

“Risk retention is necessary to give issuers a long-term interest in the performance of the underlying mortgages,” said Bair, who has participated in joint-agency rulemaking on the measure with regulators including the Federal Reserve.

Lobbying against an exemption for so-called qualified residential mortgages made her regret that Congress had included it, she said.

“Given the controversy that has surrounded this rule, I have to say I regret that Congress carved out an exemption for ultra-safe mortgages,” Bair said. “This small extra cost is the price we must pay in the short term to put a little equity behind these mortgages, to ensure that incentives are properly aligned, and to avoid a costly repeat of the mortgage crisis.”

She also called on the Europeans to muster “the will to take action” on the continent’s economic crisis, saying Greek debt may need to be restructured.

“You just need to bite the bullet sometimes,” Bair said. “It takes political courage to do that.”

To contact the reporter on this story: Meera Louis in Washington at mlouis1@bloomberg.net

To contact the editor responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net

Enlarge image

FDIC Chairman Sheila Bair

Joshua Roberts/Bloomberg

Sheila Bair, chairman of the U.S. Federal Deposit Insurance Corp., speaks at the National Press Club in Washington, D.C. on June 24, 2011.

Sheila Bair, chairman of the U.S. Federal Deposit Insurance Corp., speaks at the National Press Club in Washington, D.C. on June 24, 2011. Photographer: Joshua Roberts/Bloomberg