Sheila C. Bair, chairman of the Federal Deposit Insurance Corporation, discusses how to end the idea of "too big to fail" and speaks on the implications of the new financial reform law before taking questions from the audience at the JFK Jr. Forum yesterday. "Even as we deal with the aftermath of the current [economic] crisis," she said, "we know there are new problems on the horizon."

Chairwoman of the Federal Deposit Insurance Corporation Sheila C. Bair explained why, in her view, the recently passed financial reform legislation was necessary in the wake of the financial crisis at the Institute of Politics last night.

Bair, who presided over the FDIC—a federal agency that guarantees U.S. bank deposits—during the height of the financial crisis, argued that the recently passed Dodd-Frank Act will reduce the risk of systemic failure in the financial markets by improving federal oversight and preventing banks from taking excessive risks.

One major factor that Bair cited as a cause of the financial meltdown was the doctrine of “too big to fail”—that policymakers would be obligated to bail out large financial institutions facing bankruptcy, which provided an implicit safety net that encouraged them to take on dangerous amounts of risk.

“In world of ‘too big to fail’, risk-taking is subsidized by the government. Systemically important companies take on too much risk because the gains are private while the losses are socialized,” said Bair, who began her five-year term as FDIC Chairwoman in 2006.

According to Bair, the Dodd-Frank Act will help solve this problem by streamlining bankruptcy resolution processes and thus quickly repaying creditors.

Additionally, the legislation, passed this July, will enforce more stringent bank capital requirements, provide more protection for consumers of financial products and services, and establish the Financial Stability Oversight Council to identify and respond to future threats to the security of the U.S. financial system.

“Even as we continue to deal with the aftermath of the new crisis, we all know that there are new risks of the horizon,” Bair said, citing the possibility of rising interest rates as an example.

Bair also fielded audience members’ questions, which spanned topics ranging from subprime mortgages and other risky assets to to broader issues about the public’s perception of the FDIC.

While audience members also expressed concern over whether the reforms would be able to prevent future financial crises, Bair defended the effectiveness of the new legislation.

“Although change can be uncertain, the current status quo is an invitation to future disasters down the road. These reforms promise to usher in an era of greater stability and efficiency in our financial system,” she said.