Sheila Bair on new watchdog group, Systemic Risk Council

Sheila Bair testifies during a hearing before the Senate Banking, Housing and Urban Affairs Committee June 30, 2011 on Capitol Hill in Washington, D.C. Bair is set to head the Systemic Risk Council.

Kai Ryssdal: It's been said before, and it bears saying again: The biggest banks on Wall Street -- the ones that helped bring us the economy of the past four years, the ones that were too big to fail -- are even bigger now. JPMorgan Chase, Bank of America, those guys.

While she was the chairwoman of the FDIC, Sheila Bair tried hard -- and succeeded to some degree -- in getting regulators to follow up on what she regards as a key weakness in the American financial industry: Systemic risk. That one failure that's gonna bring everything else down with it. Ms. Bair is now out of government and but still worried about systemic risk. She's starting up a new watchdog group called the Systemic Risk Council to apply a little public pressure.

Sheila Bair, good to have you with us.

Sheila Bair: Thank you.

Ryssdal: Without putting words in your mouth, I wonder if we could define systemic risk as banking arrogance -- and I know that's a loaded term.

Bair: Oh, well, I think certainly there is probably a lot of hubris leading up to the crisis with both bank managers and, frankly, some regulators as well. I think banks -- and it's not just banks, I want to say financial institutions, because a lot of this was going on in what we call the shadow sector. It largely wasn't being done by the traditional banks that take deposits and make loans -- it was being done by investment banks and insurance companies like AIG and others. So I do think that that needs to be clarified. But if the risk-taking is such that whenever the losses occur, it's going to hurt innocent bystanders among the general public, and that's when a problem is systemic and action needs to be taken.

Ryssdal: Doesn't it say something, though, that you, as one of the most senior banking regulators when you were inside the government, now feels it necessary to -- from your position outside the government -- weigh in on this? I mean, what are we to make of the fact that you as the former chairwoman of the FDIC doesn't think we're doing enough?

Bair: Well, it is distressing to me. You know, amnesia set in pretty quickly after the 2008 crisis, and this has concerned me. But I do think perhaps we can provide more encouragement for that kind of leadership, being a voice for good regulatory policy and coordinating and prioritizing and making sure the rules are cohesive and simple, and explaining them to the public and communicating the reforms that are being undertaken.

Ryssdal: In a nutshell, if I might -- this Systemic Risk Council will try to use the power of public persuasion, really, to get regulators concentrating on systemic risk, is that the basic idea?

Bair: That is correct, because at the end of the day, with all this lobbying -- and you know, the financial institutions, they're just representing their own economic interests. And I accept that that's what they do, but it's the government's job to protect the public's interest.

Ryssdal: Do you think the government and regulators are serving the public interest right now?

Bair: I think they're trying. I think they're trying, but I think the process itself is not working well.

Ryssdal: On the theory that you are someone who is kept up at night by fears of systemic risk, what does that look like for you? What are you afraid of?

Bair: I think Europe is the big question mark, and there's a lot of derivatives and interconnectedness there I don't think anybody really understands how that would play out. So I think that's one of the reasons why I tell banks when I hear them or other financial institutions, lobby against stronger capital standards and other regulatory reforms, I wish instead of being in Washington trying to beat back reforms, they would be concentrating on bolstering their balance sheets, raising capital, reserves making sure that they're ready if something bad happens in Europe. I hope it will not and I keep being told that at the 11th hour, the European governments will get their act together and resolve this, but I haven't seen it so far.

Ryssdal: Sheila Bair, she's a former chairwoman of the FDIC. She is now a senior adviser to the Pew Charitable Trusts and the chairwoman of the Systemic Risk Council. Ms. Bair, thanks very much for your time.

Bair: My pleasure, thank you.

Ryssdal: Want more explanation on systemic risk? Our New York Bureau Chief Heidi Moore wrote an explainer. It's called "Hey Brother, Can You Spare $500 Billion for America's Banks?"

About the author

Kai Ryssdal is the host and senior editor of Marketplace, public radio’s program on business and the economy.

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