Sheila Bair gave Forbes a fairly in-depth interview in which she cautioned that there was still some risk in the banking system and suggested that the Fed should not be the top-dog regulator.

Her remarks on the banking system were pretty much what you would expect. It’s still under stress, there is little likelihood of any runs or more of the panic we saw last Fall and there will be more bank failures. From the tone of the article, it’s evident she’s simply warning that there are a lot of stressed out community banks and some aren’t going to make it. Big surprise.

Here is what she had to say on the Fed:

Bair’s focus is shifting toward the challenge of reforming banking regulation. Between bites of a sandwich that she never quite finished, she worried aloud about the current trend toward making the Federal Reserve banking’s regulator-in-chief. She cautioned the Fed could find itself making “severe trade-offs” between the needs of consumers, businesses and the economy as a whole if pressed into service as America’s top banking regulator.

“No other developed country gives their central bank the kind of power we give our central bank,” Bair said.

“[The Fed] had authority to prescribe across-the-board lending standards for mortgages, and a lot of people said they should do that and they just didn’t,” Bair says as an example of where too many roles led to lapses. “Where does the consumer role go on your priority list? At some point it just doesn’t get done. It just doesn’t get the focus it should.”

Bair instead repeated her support for a council of regulators including the Treasury, the Securities and Exchange Commission and CFTC, bank regulator (Bair says the roles of the Office of Thrift Supervision and Office of Comptroller of the Currency could be combined), the FDIC, the Federal Reserve and perhaps a new consumer regulator for financial products that has been proposed in Congress.

“It was our sense because the taxpayer is going to have significant exposure, the Treasury should have some leadership role,” she said.

Most critical in her mind: getting regulatory authority from Congress for her agency to shutter financial institutions of all sizes.

I’m not a big fan of Bair’s, in fact truth be told I think that she screwed up big time with WAMU and has more than a few other things to answer for, but I do find myself in agreement with her on the issue of the Fed and its role in regulation. She fears that they won’t act when action is necessary and actually accuses them of dereliction of duty with regards to the mortgage debacle. My fear is that they will lose whatever shred of independence they have left if given the role of central regulator. The demands of Congress and the political system in general will corrupt whichever agency is so named, assuming of course it is centralized, and I would prefer to see that happen to someone other than the central bank.

Bair says in the article that she is only sticking around until the end of her term — two more years. That may be the case but she’s certainly not been shy about trying to vastly expand the power of the FDIC before that happens. Obviously someone needs to have the power to wind down financial holding companies. The FDIC knows how to shutter community banks but that doesn’t necessarily translate into being able to resolve the likes of Citi or Hartford Insurance for example.

Though it’s just in its infancy, I find the Republicans’ initial approach to creating a new chapter in the bankruptcy code to facilitate the unwinding of financial companies to be at least some serious consideration. Traditionally, that’s been the system for resolving failures in the private sector. There’s a lot to be said for continuing with that tradition.