Bair Discusses Health of Banking Industry and Mortgage Crisis
Saturday, August 09, 2008
Woodruff pointedly began the interview by posing the question she said “everybody wants to know” – how sound are commercial banks? Bair assured viewers that “overall banks are very safe and very sound.” She said that at the end of the first quarter of this year, 99 percent of banks met or exceeded the FDIC's definition of “well-capitalized.” She did caution that there are a small group of banks having difficulties these days, and that although we just stepped out of a very benign two and a half years of no bank failures, the norm is that there are a number of banks that fail every year.
In fact, Bair said the FDIC keeps a list of troubled banks, which is governed by the supervisory ratings provided by the primary regulator of each institution. Currently there are 90 banks on the FDIC's undisclosed “troubled bank list,” and Bair said historically, 13 percent of the banks on the list eventually fail. Those on the list are given special supervisory attention, and most are nursed back to health and sold off to more stable institutions, Bair added.
Bair went on to say that it's not so much the banking industry as it is the housing sector that threatens the broader economy of the United States. She said the key to seeing the end of the economic downturn is getting home prices stabilized.
“We had a lot of lax lending,” said Bair. “Which is now leading to a lot of foreclosures, which is putting more downward pressure on the housing market. So stabilizing – trying to stabilize the market through systematic loan modifications and restructuring unaffordable loans into affordable ones so people can stay in their homes and continue making the mortgage payments – I think is really something we've been advocating for a long time. And it is really key to getting this market stabilized.”
Bair said the credit problems of last year, problems in the banking sector, rising unemployment, and spending cut-backs have all had ripple effects on the economy, but she stressed that it really comes back to the housing market. She said once it is stabilized, everything else will begin to fall into place.
Bair said that it is a fine line between encouraging banks not to engage in risky lending and to increase capital while at the same time encouraging them to keep making loans. “The signal that we send to our banks is that we want to continue lending. But we want healthy lending. We want good risk management. We want well underwritten loans to credit-worthy borrowers.” Bair said, “But it's absolutely a balancing act.”
When asked about the recently signed housing bill, Bair said, “I think it will have some impact. There are no silver bullets in this, unfortunately....there is no magic cure.” The new FHA program, she said, would definitely help. She added that the FDIC would be employing the program itself to refinance some of the loans it inherited from IndyMac's portfolio. She also said that providing a stronger regulatory structure for Fannie Mae and Freddie Mac and giving the Treasury the authority to backstop them should they find themselves in a more challenging situation was absolutely necessary to providing the funding, liquidity, and support needed for a resolution to the mortgage crisis.
Bair said she saw warnings of today's mortgage crisis as early as 2001, during her days at the Treasury Department working on subprime mortgage issues. However, she said that because everyone was making money, even the borrowers through refinancing options, it was difficult to make legislators and bank regulators take a serious look at it and view it as a threatening problem.
Bair continued, “So I think, now, as home prices continue to spiral downward and foreclosures become more and more costly, people are finally waking up to the fact that it's in everyone's economic interest to get these funds modified.” Bair said she just wishes the wake-up call had come a lot earlier.
To see Bair's interveiw in its entirety, click here.Carrie Bay
