Although investment banks continue to disappear from the landscape, Federal Deposit Insurance Corp. Chairman Sheila Bair insists that the commercial banking sector is doing just fine.
"Banks, so far, are fairing pretty well," she said Tuesday during a panel conversation hosted by The Hamilton Project, an economic policy research project of The Brookings Institution, held at the National Press Club in Washington, D.C.
Despite the outlook, Bair said she plans to add to the Deposit Insurance Fund by requiring banks to pay higher premiums as early as next month. At the end of June, the fund had $45 billion, which she considers "ample reserves." The FDIC could also ask to tap the government for additional funds, though Bair doesn't believe that will be necessary.
"Hank has enough people knocking on his door," Bair said, referring to Treasury Secretary Henry M. Paulson Jr.
Bair, who was an early critic of mortgage lending practices, thinks commercial banks seem to be holding up well because of federal oversight. "There is some virtue to regulation," she says. "The leverage ratio is an important constraint, and it's important to keep banks healthy."
In contrast, she said, investment banks have gotten government bailouts without "paying a penny in premium."
Former Treasury Secretary Lawrence Summers, who was also on the panel, was skeptical about Bair's prognosis on the commercial banking industry. "The [commercial] banking system may be less quick to realize its problems," he said.
Indeed, the investment banking industry problems were exposed the minute Lehman Brothers declared bankruptcy and Morgan Stanley and Goldman Sachs became holding companies. That's why some believe that lending practices will revert to those of the 1950s and '60s, where the majority of financial transactions were conducted through traditional banks. Summers isn't so sure, considering the variety of options that still exist, from hedge funds to pension funds.
"It's not very likely that the majority of financial activities will run through the banks," said Summers, who also argued that that more government regulation could result in financial institutions moving from activities that are regulated to those that aren't.
Right now, Summers thinks the government is too focused on plugging every leak that occurs by trying to save firms such as Lehman Brothers and AIG. "Instead, we need to limit the damage of failure," he said.