Ex-FDIC Chair: What Bank Depositors Really Need From Regulators

How drama-filled were the days of the 2008-09 financial crisis? One measure is the numerous Hollywood movies about the period, including the HBO film Too Big to Fail, based on Andrew Ross Sorkin’s award-winning book of the same title, with actress Patricia Randell playing Bair. (Number of other FDIC chairs portrayed in movies? Zero.)

Bair began warning about problems with mortgages shortly after she came to the FDIC. By 2007 problems in the banking sector became acute, and soon after Bair was thrust into the financial abyss, working alongside—and sometimes sparring with—Hank Paulson, Tim Geithner, and Ben Bernanke.

What’s Bair’s 30,000-foot take on banking right now? “We have too many rules, they are too complex, and then we don’t follow them,” she says. That’s kind of like saying, “The food’s terrible at this restaurant, but at least it’s expensive.”

I asked Bair to drill down, and she offered up a number of observations and remedies, including mandating long-term debt requirements on regional banks.

“I think people got a little complacent,” she tells me. “It’s not exactly a secret that financial assets lose value when interest rates go up. I do feel the recent banks that failed were outliers. There were some pretty fundamental mistakes in bank management—and the supervisory process has some opportunities for improvement.”

“Opportunities for improvement.” Sounds like my second-grade report card. What does Bair have in mind?

“Uninsured deposits are not stable, they run,” she says. “We saw this during the Great Financial Crisis. We’re seeing it today. There are tools that can be used to manage that, [such as to] provide a temporary backstop on transaction accounts [ones businesses use for payroll and expenses],” which were implemented from 2008 through 2012.

Now, Bair says, “I think there’s a case for providing a permanent guarantee [for business accounts]. They do that in Japan. The requirement is zero interest [paid on deposits], because you don’t want that unlimited guarantee being gained for just high yield. I certainly would not provide deposit insurance guaranteeing all deposits—that could result in a lot of distortions and moral hazard.”

Bair’s second idea is to make regional banks take on debt to protect depositors.

“I think requiring unsecured debt is part of the solution here,” she says. “A cost-effective way to promote market discipline and still help protect the uninsured is to have more loss absorption below those uninsured accounts if a bank fails,” she explains. “So if you increase that cushion, you’re going to provide the uninsured depositors more protection and dramatically reduce the chance they would suffer losses if their bank failed.”

Teresa Bazemore, CEO of the Federal Home Loan Bank of San Francisco, who’s been on the front lines of banking blowups this year, would take a different approach. The FHLB of San Francisco, part of the FHLBank System, which as a government-sponsored entity acts as a wholesale lender to banks, has seen a significant spike in borrowing by its members recently, including an 11th-hour $20 billion request from Silicon Valley Bank, which was never processed. “If regional banks need more capital, they can borrow from us,” Bazemore says.

Bair counters by noting that FHLB lending requires collateral in the form of mostly mortgage-related loans and mortgage securities, which are sold in a failure or seizure and therefore don’t provide the backstopping of deposits.

Hashing it out with regulators and bankers is familiar ground for Bair, who told me about inherent tensions between the Federal Reserve and the FDIC.

“The Fed’s monetary policy can cause bank failures,” she says. “When failures occur, the Fed typically tries to interfere. I always told them, ‘Thanks very much, but we can handle it.’ There’s more of a bailout mentality at the Fed, which is heavily influenced by the very largest banks. They would probably contest that, but based on my experience, they have always favored—and this is just factual—lower capital requirements, especially for the largest banks. Because capital protects the FDIC from loss, the FDIC always wants more capital.”

After leaving the FDIC, Bair—a University of Kansas law school graduate who once worked as a bank teller and was a protégé of Sen. Bob Dole—joined the Pew Charitable Trusts as a senior adviser. In 2015, Bair became president of Washington College, in Chestertown, Md., on that state’s Eastern Shore. Bair has long been concerned about student debt and implemented a number of programs facilitating student aid, but stepped down after only two years, citing the workload and time away from her family. Inside Higher Education reported the relationship between Bair and the college’s board, led by General Electric GE 0.53% CEO Larry Culp, an alumnus of Washington, had “deteriorated,” and that “the president and board disagreed over the board’s level of involvement in the institution’s operations.” (Bair didn’t dispute the assertions of the story; the college declined to comment.)

Today Bair serves on a number of corporate boards, including Bunge BG 3.48% (pronounced BUN-ghee), an oilseed producer and agribusiness based in St. Louis; Lion Electric LEV 0.51%, a Canadian bus manufacturer; and Paxos, a blockchain infrastructure company. She was on the board of Banco Santander SAN -0.24%, the large Spanish bank, but moved to an advisory role in 2016, and is a senior fellow at the Center for Financial Stability—which means she still follows the workings of the banking sector, including the debate over whether the U.S. has too many banks.

Those who believe we have too many banks note that with about 4,100 FDIC-insured institutions, the U.S. has more than any other country. (By some counts, Russia is second with some 400.) Around 80 banks operate in Canada, which has approximately 10% of our population and about 10% of our gross domestic product. Does that mean that either the U.S. should have 800 banks, or Canada should have 410? Hard to say.

Bank bears also point out there have been 564 bank failures since 2000. (Investors take note: Years subsequent to periods of zero bank failures are subpar for markets. Also see this fascinating 60 Minutes piece from 2009 on how the FDIC takes over a failed bank.) Just last week Janet Yellen spoke about the need for more consolidation, a view Goldman Sachs CEO David Solomon shares.

So, should we shut ‘em down, Sheila?

“I’m sorry, we need them,” Bair argues. “It may be harder to supervise so many. But almost always when we have a crisis, it’s larger institutions that have been creating the problem. Regional banks were heroes during the Great Financial Crisis. They and community banks kept lending.”

Examples of heroism come from the state of Maine, for one. Benjamin Ford, principal of Portland law firm Archipelago, says back in 2008 local banks like Bangor Savings Bank maintained their underwriting of inventories for boat sellers like East Coast Yacht Sales, based in Yarmouth, while national banks and finance companies pulled out. And local Maine banks also came through during the pandemic. “In terms of PPP, the first bank I heard that issued PPP loans was Norway Savings,” says Ford. “They began disbursing funds to their longtime customers several weeks before [the big banks]. This caused a reverse bank run as business rushed to open accounts at these local banks because the big guys waited. A lot of companies, and therefore jobs, were saved because local banks had the flexibility to rely on prior relationships with their customers. It was truly a George Bailey moment!”—a reference to the protagonist, played by Jimmy Stewart, of It’s a Wonderful Life—a banking movie from a previous era.

Speaking of fiction, Bair has taken to writing Money Tales, a series of books about money and business for kids, including titles like Billy the Borrowing Blue-Footed Booby, Princess Persephone Loses the Castle, and Daisy Bubble.

Seriously? I ask Bair.

“I know a lot of people are skeptical, but they absolutely work,” she says. “Kids like them and parents like them too. Kids need to learn the basics. With the story about a little princess and money wizards, she wants to go on an expensive vacation but her friends can’t join her because they can’t afford it. So she just tells her buddy wizards in the castle and they start printing more money. They’re funny and they’re humorous, but they’re about financial risks.”

And should be required reading for bank executives everywhere.