WASHINGTON — The government should use special assessments from systemically important financial institutions to resolve problems at troubled competitors, according to Federal Deposit Insurance Corp. Chairman Sheila Barr.

The authority of those big institutions’ primary regulators to supervise them should be preempted if the institutions run into trouble, and the “resolution authority” should have the power to sell troubled institutions’ assets promptly, Bair said.

Bair made her comments today at a Senate Banking Committee hearing on regulation of institutions that are “too big to fail.”

Bair assured members of the committee that the FDIC has the ability to “resolve” troubled banks and non-banks.

But creating a “resolution regime” that applies to any financial institution that becomes a source of systemic risk “should be an urgent priority,” Bair testified.

Putting the authority in place quickly could encourage large financial firms to put more emphasis on dealing with troubled assets, Bair said.

“The purpose of the resolution authority should not be to prop up a failed entity indefinitely, but to permit the swift and orderly dissolution of the entity and the absorption of its assets by the private sector as quickly as possible,” Bair said.

Bair also proposed creating a systemic risk council to address issues that pose risks to the broader financial system.

The body should include the Treasury Department, the FDIC, the Federal Reserve Board, the Securities and Exchange Commission, and “other prudential supervisors as well,” Bair said.

When dealing with troubled financial giants, federal agencies should have broad authority, including the power to provide analytical support, develop prudential policies, and “mitigate developing risks,” Bair said.

The power to “mitigate developing risks” appears to imply the power to preempt the authority of the primary regulator.

The Fees

To be credible, the new systemic resolution authority should be funded by fees or assessments charged to systemically important firms, Bair said.

“Fees imposed on these firms could be imposed either before failures, to pre-fund a resolution,” or fees could be assessed after a systemic resolution, Bair said.

Bair recommends pre-funding resolutions.

Bair suggested that the assessments be paid by “systemically significant financial companies,” and that they be placed in a “Financial Companies Resolution Fund.”

An FCRF would not be funded to provide a guarantee to the creditors of systemically important institutions, but rather to cover the administrative costs of the resolution and the costs of any debtor-in-possession lending that would be necessary to ensure an orderly unwinding of a financial company’s affairs, Bair testified.

“Any administrative costs and/or debtor-in-possession lending that could not be recovered from the estate of the resolved firm would be covered by the FCRF,” Bair said.

If a company shrank enough to become small enough to fail, the assessments would stop, Bair said.

Dodd On Timing

Sen. Christopher Dodd, D-Conn., chairman of the committee, said Congress may act quickly to pass a bill dealing with regulation of the biggest financial institutions, and that it may act even more quickly to address the request for regulators to have the authority to sell troubled institutions’ assets more promptly.

“I will talk to my colleagues about whether we should proceed quickly to implement this authority or wait to do it as part of a package,” Dodd said.

Dodd later told reporters he is rethinking the idea of creating a resolution authority for the biggest financial institutions only as part of a larger package.

Links to the written versions of the hearing witnesses’ testimony and a video recording of the hearing are available here.