By Silla Brush - 05/03/10 12:39 AM EDT
A top banking regulator is raising red flags about Senate financial legislation that would force Wall Street banks to spin-off their derivatives operations.
Sheila Bair, chairwoman of the Federal Deposit Insurance Corporation (FDIC), said in a letter to senators that the provision would force $294 trillion in the face value of derivatives out of banks and into riskier nonbank financial firms.
Bair said the provision, originally authored by Senate Agriculture Committee Chairwoman Blanche Lincoln (D-Ark.), could have a series of unintended consequences. The provision is one of the most aggressive efforts in legislation to regulate the multitrillion-dollar market for financial derivatives. The financial industry is lobbying heavily against the measure, which would fall overwhelmingly on Wall Street's biggest firms.
"I urge you to carefully consider the underlying premise of this provision -- that the best way to protect the deposit insurance fund is to push higher risk activities into the so-called shadow sector," Bair said in a letter to Lincoln and Senate Banking Committee Chairman Chris Dodd (D-Conn.)
She said some derivatives trading is largely speculative, but that others, "have legitimate and important functions as risk management tools, and insured banks play an essential role in providing market-making functions for these products."
Sens. Mark Warner (D-Va.) and Kirsten Gillibrand (D-N.Y.) have both also warned of the consequences of the provision.