FDIC’s Bair calls for debt limit increase

{mosads}And she said it was up to Congress to make sure that faith was kept intact.

“That confidence is based solely on the belief that policymakers will do whatever is necessary to make good on the nation’s financial obligations,” she said in her opening testimony. “Any signal to the contrary risks permanently destroying the inviolable trust that investors the world over have placed in this nation for more than two centuries. I urge Congress to reaffirm this trust by committing to a responsible increase in the debt ceiling.”

Bair, who will leave the FDIC in July after her five-year term expires, joined the ranks of Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke as top officials of the executive branch that have drawn a hard line on raising the debt limit. Their pleas come as lawmakers are trying to come to an agreement to raise the limit — Republicans are demanding significant spending reforms be paired with any increase.

While telling Congress they must raise the debt limit, Bair also noted the nation’s long-term fiscal issues carry their own market risks. Noting the cost of buying insurance against a default by the U.S. government was over 20 times more expensive now than it was in 2007, she said it was “essential” for the government to slow its debt growth.

“There is no greater threat to our future economic security and financial stability than an inability to control the size of U.S. government debt,” she said.

At the hearing, Bair worked to assure lawmakers that new authority granted under Dodd-Frank allowing it to wind down ailing financial firms will not prove problematic.

Several Republicans have expressed concern this new orderly liquidation authority could engender a “too big to fail” mindset in institutions that qualify for it. If the market sees the government identifying those institutions as “systemically significant,” it could carry the implicit perception that they will be bailed out if endangered, they contend.

But Bair maintained that the liquidiation would be “every bit as harsh as bankruptcy,” and the provision was designed to prevent future government intervention.

“We do not want bailouts. We want market discipline,” she said.

Bair was also asked several questions about the new Consumer Financial Protection Bureau (CFPB), created under the Dodd-Frank financial reform law. A common concern for Republicans about the new agency is that it is not required to consider the safety and soundness of banking institutions when regulating consumer financial products, which in turn could result in burdensome and costly regulations for banks.

Financial regulators who sit on the Financial Stability Oversight Council (FSOC) do have the ability to overrule CFPB regulations under Dodd-Frank. But some GOP members expressed concern Thursday that the fact the eventual CFPB director would sit on the FDIC’s board of directors could present a conflict of interest.

But Bair argued the opposite, saying the a CFPB presence on the FDIC board could “sensitize” it to safety and soundness issues.

“There is a close connection, it’s really two sides of the same coin,” she said.

She was also pressed by Republicans on whether she would prefer to see the CFPB run by a bipartisan commission as opposed to a lone director as it is currently designed. The FDIC is run by such a multiperson operation, and House Republicans are pushing legislation to do the same to the CFPB.

While Bair said she liked the setup at the FDIC, she did not go so far as to suggest it for the new agency.

“We were sympathetic to the board approach. We have a board. I like boards,” she said, before adding “the statute, as is, is one we support and one we think we can work with.”

But if a board arrangement were adopted, Bair said she would like the FDIC to have a spot as “reciprocity.”

She added that the CFPB could actually work to the benefit of smaller banks, by regulating many of non-bank competitors that previously escaped regulatory scrutiny.