Sheila Bair, a free market advocate who helped oversee the most dramatic bailout of the financial system since the Great Depression, will leave the Federal Deposit Insurance Corp on July 8, the agency announced on Monday.

Bair is finishing her five-year term, and passing off the chairmanship of a reinvigorated FDIC with vast new powers to take down failing financial giants.

Her tenure was often a study in contrasts -- a Republican appointee who became the darling of Democratic lawmakers, a calm public presence who clashed behind the scenes with regulators and Wall Street, and a champion of free markets who believes firm regulation has its place.

On Monday, Bair, a 57-year-old from Kansas, did not announce what she will do next. She previously said she plans to go back to academia or work at a nonprofit, but not enter the lobbying world or Wall Street.

Prior to joining the FDIC, Bair was a professor at the University of Massachusetts-Amherst. She has held a variety of jobs in government, including being a top aide to former Senate Republican leader Robert Dole.

The Obama administration has yet to announce who the president will nominate to replace Bair, but a leading candidate is FDIC Vice Chairman Martin Gruenberg, according to industry and congressional sources.

Gruenberg has been at the FDIC since 2005 and before that was a longtime Democratic aide in Congress, where he focused on banking issues. Gruenberg, unlike Bair, is not known for publicly scolding Wall Street excess, but colleagues say he would have a firm hand in policing banks.

Bair will leave behind an FDIC with more authority to govern banks and financial markets than when she first arrived, in part due to her efforts.

Under last year's Dodd-Frank financial oversight law the government can designate non-bank financial firms as being systemically important financial institutions because their failure could roil markets and damage the economy.

The FDIC has been given the authority to wind down or liquidate these failing firms.

It will enhance the power and importance of the FDIC for years to come and will keep them at the center of the debate in the next financial crisis, said Ed Mills, a financial policy analyst with brokerage FBR Capital Markets.

It will be up to Bair's successor, however, to flex this new muscle.

In recent months Bair has been outspoken that banks and other large financial firms must show regulators they can be easily broken up when they fail.

If they do not, she has argued for forcing them to reorganize and possibly downsize.

This threat will only be as good as her successors' desire to follow through and their ability to convince fellow regulators to go along.

During her tenure Bair at times rankled other agency chiefs during debate on the best way to deal with failing firms and at times treaded on their turf.

But supporters have credited her with going against the sometimes go-along-to-get-along culture of Washington bank regulation.

In September 2008 John Reich, head of the Office of Thrift Supervision, grew angry with Bair when she told Washington Mutual that the FDIC had a less favorable view of its credit worthiness than OTS, the lender's primary regulator.

I cannot believe the continuing audacity of this woman, Reich wrote one his deputies, according to a recent congressional report on the financial crisis.

Two weeks later Washington Mutual became the biggest bank failure in U.S. history.

Bair has been an outspoken advocate of strongly implementing the Dodd-Frank financial oversight law and that it ends the era of too-big-to-fail firms.

That contention has brought some eye rolls from observers who note financial markets are not acting like they believe government bailouts are a thing of the past.

Last week, Bair said policymakers must convince markets they are.

This situation can only be regarded as a new and dangerous form of state capitalism, where the market assumes large, complex and powerful financial companies are in line to receive generous government subsidies in times of financial distress, she said at a banking conference sponsored by the Federal Reserve Bank of Chicago.

(Reporting by Dave Clarke and Kevin Drawbaugh; editing by Andre Grenon and Phil Berlowitz)