FDIC chief calls for tighter investment bank rules

Investment banks have looser government oversight than commercial banks, whose financial stability is more closely supervised by regulators.

Ever since the swift decline and government-backed rescue of Bear Stearns in March, policymakers have debated whether investment banks should be subject to tighter controls.

Sheila Bair, chairman of the Federal Deposit Insurance Corp., said Wednesday the government should prepare contingency plans in the event a major investment bank fails. Investment bank regulation should more closely resemble that of commercial banks, which are subject to heavy scrutiny by the FDIC and other regulators, she said.

"The government cannot be put in the position of having to simply write a blank check when these institutions get into trouble," Bair said in a speech to the Exchequer Club, a group of banking industry lawyers, lobbyists and trade association officials.

Continuing trouble at investment banks has been apparent this week. Lehman Brothers Holdings Inc. posted a stunning $2.8 billion loss on Monday, and Morgan Stanley said Wednesday that its quarterly profit dropped by 61 percent.

While Congress appears unlikely to tackle the thorny issue of overhauling financial regulations this year, initial discussions are getting started.

One possibility would be for the FDIC to run a failing investment bank after Federal Reserve or the Securities and Exchange Commission decided to shut it down, Bair told reporters following her speech. The FDIC has long done so for commercial banks, and has handled four bank failures this year.

However, at least one analyst questioned whether such a sweeping change to financial regulations would be effective, given that hedge funds, overseas investors and other financial players likely could elude U.S. oversight.

"It's a fundamentally absurd idea that Congress can ensnare everybody," said Bert Ely, a banking industry consultant in an Alexandria, Va.