In testimony at a Senate hearing Wednesday, FDIC Chairman Sheila Bair called for a new system of supervision that prevents institutions from taking on excessive risk and becoming so large their failure would threaten the financial system.
She suggested the Treasury Department, FDIC, Federal Reserve and Securities and Exchange Commission could be members of a new "systemic risk council" set up to monitor large institutions and potential risks to the system.
Bair stressed again that the "too big to fail" policy used by the government in the financial crisis must end.
"Our current system has clearly failed in many instances to manage risk properly and to provide stability," Bair said.
She maintains that a mechanism is needed to resolve troubled financial institutions similar to what the FDIC does with federally insured banks and thrifts.
"We're talking about a resolution and not a bailout," Bair told the Senate Banking Committee. If needed, big banks and other financial institutions should be broken up in those instances, she said.
Policymakers are trying to craft a new system of financial rules to replace the "too big to fail" stamp put on federal policy in the financial tumult, as the government rushed in to rescue insurance giant American International Group Inc., and pumped tens of billions of dollars into Citigroup Inc. and Bank of America Corp.
The Obama administration has presented to Congress an extensive overhaul of financial regulation meant to prevent a repeat of the banking crisis. A pillar of the plan is creating a so-called systemic regulator to monitor against the risks that plunged markets worldwide into distress last year.
A "council" of regulators would be better equipped than a single agency to exercise that oversight, writing rules and collecting data on large institutions that pose potential risk to the system, Bair said.
For taking over and resolving financial institutions, Bair said the FDIC is well equipped to do so. She suggested Congress could give the agency the authority to resolve bank holding companies like Citigroup or Bank of America now under the supervision of the Fed. The FDIC now can take over and resolve only the subsidiaries of bank holding companies that take federally insured deposits.
Rep. Barney Frank, chairman of the House Financial Services Committee, and other lawmakers have proposed that the Fed assume the role of systemic regulator.