WASHINGTON, Jan. 15 (UPI) -- Regulators and the market failed to control the "shadow banking system," Sheila Bair, head of the Federal Deposit Insurance Corp., said in Washington.
In testimony before the Financial Crisis Inquiry Commission, Bair said the last wave of federal regulation after the savings and loan crisis 20 years ago encouraged the growth of financial institutions outside the regulators' reach.
These institutions became so complex and large they could not simply declare bankruptcy, when they got into trouble, she said. They are also outside FDIC receivership.
Bair said what is needed now is a "holistic" regulatory system.
"To be sure, we can improve oversight of insured institutions, but if reforms only layer more regulation upon traditional banks, it will just create more incentives for financial activity to move to less regulated venues," she said. "Such an outcome would only exacerbate the regulatory arbitrage that fed this crisis. If that occurs, reform efforts will once again be circumvented, as they were over the past two decades."