US should put an end to shadow banking system, no more "too big to fail"

 Appearing at the Institute of International Finance meeting FDIC Chairman Sheila Bair stated that the "too big to fail" doctrine in the financial system should be abolished while shadow banking industry that is beyond the regulators’ reach must also be restrained. She said that the power of the US proposed authority that would shut down systemically risk financial companies should be extended to cover insurers and hedge funds.

"We need to end 'too big to fail' and this needs to be an overarching policy that applies to everyone," Bair said.

"I believe that the new regime should apply to all bank holding companies that are more than just shells and their affiliates regardless or not whether they are considered to be systemic risks," she said, adding that including only systemically important firms in the shut-down regime could reinforce the 'too big to fail' doctrine.

Besides, Bair said that the companies subject to systemic risk shutdown authority should also be required to publish “living wills” – details on how an orderly wind-down would play out – on their websites so as to give clearer picture to their shareholders and customers.

Bair stated that restraining the shadow banking system and regulatory arbitrage is her top priority for the US Congress which is seeking to make alterations in the US financial regulation.

According to Bair there were a number of problems in extending the resolution authority beyond banks to insurers and hedge funds, which she called a "sea change" in their oversight. But these could be overcome and it was appropriate to consider including them in the systemic risk resolution authority regulation.

"If the entity is systemic, that means if the entity gets in trouble it could create problems for the rest of us," she said.