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By Dave Clarke
March 1, 2011 2:24 AM EST
America's big international banks may have to restructure and downsize their operations now, unless they can prove they will be easy to dismantle in another financial crisis, said U.S. regulator Sheila Bair.
Multinationals will need to set up more foreign subsidiaries and realign their legal structures to make it easier for regulators to liquidate them if necessary, Bair told the Reuters Future Face of Finance Summit.
Bair, the chairman of the Federal Deposit Insurance Corp, said she wants to spend the rest of her four months on the job getting rid of the notion that some firms are "too big to fail."
If that means that firms are forced to divest businesses, so be it.
"If they can't show they can be resolved in a bankruptcy-like process... then they should be downsized now," said Bair, chairman of the Federal Deposit Insurance Corp.
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"There is no reason in the world why they should get some special treatment backstop that other businesses in this country don't have," Bair said.
She also said investors need to accept that they will get lower returns from banks that hold higher capital and run safer operations.
Bair's words are a warning shot for the biggest U.S. banks, including Citigroup, Bank of America, JPMorgan Chase, which are expected to submit their so-called "living wills" to regulators by the end of the year.
The United States is more advanced in the "living will" process than other G20 countries, which have agreed in principle to an orderly liquidation process for big firms.
The aim of the living wills is to give regulators a credible blueprint to dismantle a financial firm whose collapse could significantly harm markets.
That process is designed to avoid a repeat of 2008, when the Bush administration bailed out American International Group and other firms but not Lehman Brothers. Lehman's bankruptcy virtually froze capital markets.
Bair said she does not think the "living will" process will lead to breakups of big banks.
But when asked if some large firms will have to make major changes to their business models to submit "credible" living wills, Bair unequivocally said yes.
"I think that is absolutely the case. Far too many of them they manage their businesses along business line as opposed to legal entity," Bair said.
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