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The US's Federal Deposit Insurance Corporation (FDIC) chairman Sheila C Bair is confident that there is no evidence of a double-dip recession and that the problems of Greece and euro zone are manageable. Bair, who has been at the forefront of the US financial sector reforms and an early critics of sub-prime loans, says adequate lending standards will help in preventing future crisis and keep asset prices in check. In an interview with FE's Sunny Verma, Bair says the US "wants the banks to get to basics". Excerpts:You have come here to learn about Indian initiatives towards financial inclusion. Can you give us the US perspective on the subject?We have a very strong interest in financial inclusion at the FDIC. We completed a survey and made it public last year on how many Americans did not have a bank account or what we call under-banked, which means they had a bank account but they were using other high-cost financial service providers for certain types of services. One out of four Americans households are under-banked and actually 8% do not have a bank account. So this is an issue and I think a bank account whether it is in India or the US is really the first step to bring inclusion in the financial and economic system.Would it be correct to say that you are trying to make the financial system compatible with the real economy?I think we would like banks to get back to basics. And I would say it is important for people to understand that a lot of the extant unreportable mortgage loans were not made by insured banks in the United States. They were being made by mortgage lenders other than banks and they were being funded by these Wall Street securitisation people. So a lot of that was being done outside the banking system. We do think its important for the banks to be in the basic business of taking deposits and making loans, and yes, we encourage them to provide products that meet the needs of all the people in our country including lower income people. This is one of the reasons why we have interest in figuring out bank accounts that are economically feasible. So that's where we think so much of what is going on in India is interesting, especially mobile banking.Do you believe financial activity within the banking system should expand and not outside it?Yes. It should be. We want insured banks to provide services to all those who live in our country in a responsible way.The Reserve Bank of India has reformed the securitisation market by introducing lock-in period and retention limits, closely following the similar reforms in the US. How do see this market evolving?We think these are good ideas. We are imposing similar requirements at the FDIC and the Securities and Exchange Commission (SEC), our securities regulator. Those who originate loans and then sell them into securitisation vehicles, are now required to retain 5% of the amount.Where does the US stand in terms of its economic recovery?Well, I think our recovery will continue. It will be a slow and steady recovery though it might be uneven at times. We don't see evidence of a double-dip recession. There are lot of uncertainties but we don't see those at this point of time. I think the priority needs to be on job creation and making sure there is enough credit for small businesses that are heavy drivers of job creation. There are uncertainties surrounding the European situation but we have confidence that the European governments will continue to work towards stabilising that situation, and fully implement the trillion dollar stability fund that they have announced.Some people argue that there is no immediate fix to the Greece crisis, that is spreading fast to some other European nations. What is your view on it?I think it's important for people to not over react. Yes, there are problems in some of the euro zone countries and that's why we have announced some of these stability measures. These are fiscal problems that will have to be dealt with. Virtually, all advanced countries have had to stretch their balancesheets as part of the crisis response and ensuring that we go back to the path of recovery. This is something all governments are going to have to deal with. I think, to an extent, there is a positive lesson to be learnt from Greece. It's a wake-up call to all countries not doing well on the fiscal front.What is your assessment of the sovereign debt problem? Are we facing risks of sovereign defaults?I think it will be country-specific and the markets will differentiate. I don't see this blowing into a global situation. There will be some countries that have more immediate problems than others. I don't think it will be expanding into a global situation.You mean you don't agree with the notion that global economy will move from bubble to bubble, crisis to crisis?I think the best protection again bubbles are high, strong capital standards for banks and other lending institutions, and strong lending standards. So when you take a loan to buy a house or anything else, you make sure that there is a down payment and the borrower has enough income to repay the loan regardless of what happens to the collateral value that secures the loan. I think we have got away from that in the US. We have learned that lesson hard and I think people in India are learning from our mistakes.Asset prices have started shooting up again, especially in the Indian real estate sector. Is this commensurate with the speed of global recovery or does it indicate another set of asset price bubble?That is hard to say and I think within developed countries you will see accelerating growth. With accelerating growth you will see acceleration in demand and of course finally increase in asset valuations. So again, I think this is exactly what the Indian government and regulators are doing to make sure that banks have good lending standards in place to hedge against any type of unsustainable lending.What about housing prices in the US?Home prices have now stabilised. They are not going down anymore. And again I think so long as the recovery continues, this is something that we can work out.Emerging markets like China and India have started raising interest rates and winding down fiscal stimulus, and at the same time we have a fresh, huge bailout package for Greece? How will the global leaders, when they gather at G-20 meeting later this month, handle this contradiction?Well, fortunately I am not a central banker. I think this is a very difficult situation for central bankers throughout the world. I think the difficulty in knowing when you start pulling back and by how much is extraordinarily delicate. And, to some extent, it is going to influenced by regional factors.Have the bailout packages in the US worked their way through?The measures that have been taken were necessary. They were unfortunate but necessary and they did stabilise the system. So they are successful in that regard. Going forward, I think Congress is now moving ahead with legislative reforms — financial services reform package. And one important piece in this is to give the FDIC the power to resolve large financial intermediaries, if they get into trouble because they were not well managed. There is not going to be a process, alternative to bankruptcy, to allow the FDIC to wind them down. I think this will do a lot to avoid any need of bailouts, going forward.Are you confident that future crisis can be avoided? Have we learnt enough from the past excesses?I think they are avoidable. You will always have cycles. You always have good times and bad times but not the kind of extreme situation we have in the past crisis. This crisis was stoked by poor lending standards.
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