FDIC: Bank Troubles Expected to Grow at Manageable Pace

Fox
Posted: 2008-04-29 17:19:02

The number of banks in financial trouble nationwide is expected to grow this year, but any failures should be manageable, one of the country’s top banking regulators said Tuesday.

New data on the Federal Deposit Insurance Corp.’s so-called troubled-bank list will show an increase over the current 76 banks on the list, Sheila Bair, chairman of the FDIC, said. But, she cautioned “that is not a big number” and that increase will not necessarily lead to a wave of bank failures.

“Historically, most of the banks on the troubled-bank list do not fail,” she said.

Speaking at the Society of American Business Editors and Writers annual meeting in Baltimore, Bair said there is a risk the problems in the housing market, and particularly with local construction loans, will ensnare a larger number of small banks, but, at least currently, smaller banks are in better shape than large banks.

The FDIC is poised to benefit from the new regulatory blueprint put forward by the Treasury department, and, while Bair said she believes in a free-market approach, the recent problems with mortgages show that the government needs to regulate the industry.

“Free markets and some baseline level of regulation are compatible,” Bair said.

But the key is fewer, not more, regulators, she said. One of the problems with the current system is “regulatory arbitrage,” where banks chose what regulators - often weaker ones - they fell under. Limiting the number of regulators these banks are accountable to is the key.

“Regulatory arbitrage is a problem in this country,” she said. “Some homogenization needs to take place.”