Jumping into the deep end: Washington hand, Sheila Bair, guides the FDIC through minefields of...

FDIC Chairman Sheila Bair has extraordinary credentials. But, then, achievers, not slouches, are generally named to head the agency that insures most of the nation's savings. But she does have a unique "first" to her credit, something that Bair has done that no other chairman of the agency has ever

This wasn't actually a run, nor even a long-lived case of jitters, but a momentary lapse into looniness in a lobby. Let's say that a busy bank manager grew a few more gray hairs; a few citizens' pulse quickened;, and a future FDIC chairman learned a key lesson about banking--one that she later put into print.

"When I was small, I went into a local bank with my father," Bair, 52, explains in an interview with ABA Banking Journal. "As he was waiting on line to make his banking transaction, I saw that the bank's vault was open a crack. So I wanted to peek in. I wanted to see all the cash." But, as she stepped towards the open vault, the young girl had a shock--no money in sight. Her concept of what banks did was substantially shaken.

"All I saw were these safe-deposit boxes," says Bair. "So I came running back, saying, 'There's no money in the bank!' It got people quite excited."

A flustered bank manager ran out of his office to defuse the stunned crowd's concerns, and explained to the future depositinsurance agency chairman where the money really was: out working.

Highlights for bankers

Something else that Bair has done that other chairmen haven't is turn an interest in finance and an interest in children's education into a sideline as an author. In recent years Bair has written not only basic financial articles for Highlights for Children, well-known to anyone who's ever been to a dentist office, but also a new financial fable for children to learn to save by: Rock, Brock, and the Savings Shock. The 2006 hard-back (Albert Whitman & Co.) is the story of the power of compound interest, illustrated through a special deal a grandfather makes with the sloppy-but-frugal Brock, and the sleek-but-spendthrift Rock.

The book is dedicated by Bair to her own children, 13-year-old Preston Cooper, whom she describes as a future scientist--and present libertarian--and six-year-old Colleen Cooper, whom she's convinced will become a litigator. Her husband is Scott P. Cooper, a lobbyist.

Years after her eventful first bank visit, writing for Highlights, Bair turned her childhood experience into a lesson for youngsters about what banks really do: take in deposits and put them back out in the community as loans, fueling growth and improvement.

"I got this wonderful fan letter from a little girl in India," Bair recalls. "She had read the article and told me how much she enjoyed it, and how funny she thought it was. And it was. But there was also the message in there, that the cash wasn't actually sitting in the vault."

"Banks have changed a lot since I was a little girl," she wrote. "But they still take deposits and make loans, just as they did when I peeked into my bank's vault so many years ago. Though I didn't know it then, there's one thing I know now. All your money may not be locked inside the thick walls of your bank's vault, but it's as safe as it can be."

Three years after writing that, Bair found herself at the top of the group of people whose jobs help make that possible (along with bankers, of course).

Festival for a wonk

Sheila Bair knew, as she took office in June, that she was pretty much jumping into the deep end of the job, with no chance at a slow start. But this is the kind of thing that makes Bair's day. She admits to being "a little bit of a policy wonk," and FDIC was handed sufficient challenges to satisfy the most die-hard wonk.

"We have had a really interesting set of issues that have been ripe for decisionmaking," says Bair, "presenting the opportunity to truly make a difference in terms of banking regulation and oversight."

FDIC would have a very full plate of issues under ordinary conditions--ongoing development of Basel 2 and the Basel 1A capital reform proposals; the Wal-Mart/industrial loan company controversy; the commercial real estate lending debate; and much more. But overlaying this is implementation of the Federal Deposit Insurance Reform Act of 2005.

Congress gave FDIC only months to implement the regulations--many controversial--that would put the new insurance act into place. Some of the most controversial aspects of the implementing regulations must be in place by Nov. 5--as you read this, the industry will be absorbing what, how, and why FDIC finalized things--including regulations dealing with FDIC's proposed risk-based deposit insurance scheme, and revisions to the designated reserve ratio framework.

Winners and losers

"We've had a pretty fast ride," since she came on board, Bair admits. Bair was interviewed by ABA Banking Journal in September, while she, her fellow board members, and FDIC staff, were all evaluating options public and industry comments, about the proposals made.

Elaborating on the days she's been having since arriving, Bair says the office hours haven't been bad, although in the Age of Blackberries and e-mail, "I'm kind of on the job 24/7."

But it's the pace, all headed toward a funnel, that's notable. At one point in the interview, Bair gestures to the mostly empty walls of her office. The only decorations of note are the various federal commissions she's had for appointive posts--large, diploma--like things. In L. William Seidman's day, the office was dominated by Southwestern art, including a scene from his own ranch, and other chairmen made personal marks of some kind. Some filled a breakfront, that's been in the office for years, with meaningful items, mementos, awards, what have you. This chairman has stuck to some books. She's had other priorities.

"There's been a tremendous amount of work, a tremendous amount to learn," says Bair. "There have been a lot of negotiations, and many discussions internally and externally. We've had to get through many very tough issues, not all of them popular, and, unfortunately, on some of them, while I hope to find consensus, by definition there will be winners and there's got to losers."

Bair has been in government and politics long enough to know that that's nearly always the case. She has spent more than 20 years in government service, including time as a federal lawyer, an aide to Sen. Robert Dole, a member of the Commodity Futures Trading Commission, and even a try at running for Congress, back in her home state of Kansas. "Win-win-win" scenarios mostly exist in consultants' promises, not in the world of economics and politics.

"But it's particularly true of deposit insurance reform," says Bair. "We have had to make some decisions about who's higher-risk, who's safer, and how that will impact certain banks." The very concept of risk-based premiums implies a judgment call, and differing treatment.

That some bankers aren't, haven't, and won't be happy--say, executives at de novos, which faced FDIC's proposal to classify them as the highest risks among sound banks, and hence, mandated to pay the top rate in that category--is a given.

Bair came to the issues confronting FDIC on her watch with much background knowledge, and personal experience with the players, and the agencies and organizations, that all had a stake or an interest in the outcome of the debate. Many aspects of the tussles have been kicking around for years, and, as is usual, have gone through their various incarnations before actually being passed.

But Bair says she has had an advantage, working through all these matters, and other ones that were confronting her as she came aboard--the Wal-Mart industrial loan company proposal, put on regulatory hold for six months by Bair's administration, is a good example. The advantage: She came in having not staked out personal positions on much of what's come up in either academic or political life.

"In this way," she explains, "I can be open-minded and flexible, able to really listen to all sides, able to work with my board and staff to come up with the right solutions."

(Regarding Wal-Mart et al, why just six months? In fairness, says Bair, you have to realize that the applicants deserve to have an answer within a reasonable time. At ABA's October Annual Convention, she said an extension was unlikely.)

Implications of implementations

Bair is not a coy interview subject, dropping hints and such. When she says she can't discuss a matter still under internal discussion, she's not fencing. She means it, politely, but she means it. Next question.

But she is very much aware of the ripple effects that the final shape of the insurance reform regulations could have.

One is the strong reliance the proposed risk-based assessment system put on CAMELS ratings. Bair points out that the proposed framework for smaller banks featured other factors besides CAMELS, and that the request for comment sought input on the ratings' role.

"I want my examiners to go into banks and make their best assessment," says Bair. "I don't want them to feel pressured either way, because there may be a premium attached to their decision in a more profound way than before. The banker-examiner relationship is delicate, and one that can potentially be complicated through the proposed new pricing structure."

With all the focus on CAMELS--revised a number of years back to add "S" for sensitivity to market risks--is a review of its elements in the offing? Bair says it's not. And she adds an interesting viewpoint on the buzz-phrase that's been sweeping banking: "enterprise risk management."

Bair feels some of this talk has been applied a bit broadly out in the industry. Larger, publicly traded institutions--the Sarbanes-Oxley league--certainly need to have ERM in place, she says. But smaller banks have long had FDICIA requirements for internal controls and this is essentially where their aim should be.

"A lot is just common sense," says Bair. "Bank managers should obviously have internal controls, and should be doing their own risk assessment. For a smaller bank, I don't know that [ERM is] necessarily important if you're doing your job as a manager and you are working with your board. I do sense that there may be some angst among smaller banks about this. But if you are doing good bank management, maintaining internal controls, and continuously assessing your own internal operational risks, then you don't need some fancy separate structure, and you don't need to pay some highpriced consultant to set that up."

Bair isn't attacking the concept of ERM--immediately prior to coming to FDIC she was Dean's Professor of Financial Regulatory Policy at the University of Massachusetts, Amherst, and taught a course on corporate risk.

Indeed, Bair is pretty high on today's bank management. Younger CEOs have the benefit of more and deeper training than their predecessors, but the older CEOs still in place have the advantage of experience in the bad old days of the 1980s and 1990s. She sees the industry, overall, as in a decent place as the economic cycle turns.

"Banks have known for some time that this could be coming," says Bair, "and I think for the most part they are ready."

Banking's risk management abilities are better than ever, and Bair thinks the new deposit insurance framework, in whatever form it solidifies, will be a further incentive for improved risk management.

Are there areas of reform that could, however, lead to "gaming the system"? Bair pauses, harks back to her term at the Treasury Department, where she was Assistant Secretary for Financial Institutions, and her first job was to represent the Administration on deposit insurance reform. Then she says that a system like this can be like a new tax structure.

"People are always trying to find loopholes, so you have to try to prepare for that, and deal with it as you can," says Bair. "Market ingenuity is there, but at this point I can't anticipate what creative ways people might come up with to reduce their assessment." She hopes FDIC's final product will be seen as fair enough that banks won't entertain such ideas.

Socking away strength

In a related vein, as the regulators continue to revise the capital framework, Bair has had some surprises.

"I'm amazed," she says, "at the number of community banks that are already telling me that they are just going to stick with Basel 1, even though it's going to mean a higher risk capital level for them. But it's part of their culture; smaller banks like to be well-capitalized. As a regulator, I like that."

Turning the concept about, there is the matter of FDIC reserves. Bair is quite aware that bankers want to see reserves built back up slowly, with premiums kept to minimum levels. But she makes a case for strong levels of reserves. She says the need is evident when one considers consolidation, and the tremendous exposure if only a single large bank closed.

"So I hope that the industry will try to view this from the vantage where I need to view it," says Bair, "and understand our need to keep reserves at prudent levels. And if that means increased premiums, that will mean increased premiums."

Access to banking

Though the focus is now squarely on insurance reform, FDIC, and Sheila Bair, are about much more. Something she describes as a "pet issue" is access to banking services. She has researched, written, and spoken on it in her past "incarnations." Now she is in a position to directly influence some change.

"I believe in banks, and I believe in a regulatory structure," explains Bair. "I think banks are not perfect, but for the most part they are very good corporate citizens, and they spend a lot of money on regulatory infrastructure and good management. They do this to make sure they are serving their customers well. We also have a regulatory apparatus to oversee not only safety and soundness, but fair treatment of customers."

That said, Bair elaborates: "It frustrates me that low-income populations don't access banks the way they might."

Bair believes there are two tiers of need that must be addressed. One is the "unbanked," who don't use banks at all, and the other is those customers who don't use banks as fully as they might, the "underserved." Such customers may have bank accounts, but, for some reason turn to higher-cost providers for mortgages, short-term loans, and other credit needs. Bair believes FDIC can educate both these populations about banking, and educate banking about serving these populations. She says there are many proven models, and details one she's keen on: banks offering free tax preparation.

"I see banks going into neighborhoods with community groups, offering free tax preparation service," she says. "They can be opening up bank accounts at the same time, enabling people who are getting refunds to have a place to have the refund sent by direct deposit." She adds that IRS now permits "split refunds," so the banks could open two accounts for each filer: checking and savings. She sees this effort as not only addressing fresh markets for banks, but also the nation's low savings rate, which disturbs her.

Bair is also very interested in school banking programs. She says these can be used not only to instill the savings habit, but, in the case of immigrant families, help build the level of trust in U.S. banks that the children's parents may not have had in the banks of their native lands.

"You know, kids have a real, natural interest, at an early age, in learning about money," says Bair. "We should foster that. There's nothing evil about teaching kids about how to manage money--it's a good skill for them to learn. And we need to have a mindset in our educational system that it's an important skill."

Regulatory burden issues

By now, you've no doubt realized that Sheila Bair will not be the kind of chairman who will tell the industry only what it wants to hear, and one who will defy attempts at political typecasting. Her viewpoints on regulatory duties and burdens reflects this.

"I believe in regulation, but I don't believe in unnecessary regulation," says Bair. Some regulations banks simply have to learn to live with, according to Bair, because they occupy a special place in the economy and that's the price. The very safety that customers perceive in banks, she says, is the resulting benefit of that.

However, Bair admits to a certain regulator's thirst for data.

"I love to get information," she says, "so I know we need to kind of hold ourselves back and understand that when we ask for information that imposes an extra paperwork burden on the bank."

But what Bair would like to find out more about is to what extent regulatory burden is hampering banks' efforts to broaden the markets they serve.

"Many alternative service providers are more successfully serving many low-income neighborhoods," she explains. "These firms do not have the same types of regulatory burdens that banks have."

Bair states it plainly: "I want good, high-quality regulation, but there are unnecessary impediments that bankers feel are hindering their ability to broaden access to banking services."

Her clear message: The industry's challenge will be to demonstrate what those braking forces are--and what they could and would do in their absence.

In addition to a career in public service, new FDIC Chairman Sheila Bair has worn another hat: author. She has written extensively in two areas of personal interest: access to banking services for the unbanked and the "underbanked," and financial education for children. Rock, Brock, and the Savings Shock is her most ambitious effort to date, a children's book dealing with the beauty of compound interest (so long as you are a saver, that is). Bair hopes to encourage banks to do more in both areas now that she is at FDIC.

By Steve Cocheo, executive editor