When Sheila Bair steps down next year from her post at the helm of the FDIC, she should leave in her wake a crowd of community bankers swathed in mourning and lamenting her departure.

That isn't because Bair has been a paid-up member of the cheerleading squad for the nation's small and community bankers, but rather because she has been an unusually thoughtful and a particularly effective chair of the FDIC and steward of the banking insurance fund. That, along with her gravitas and the respect she has earned within Congress, have ensured those actions or recommendations that she has made that have favored smaller bankers were more welcome and more likely to be listened to than if they had come from the loudest and most ferocious lobbyist on the hill. When the second-most powerful woman in the world (according to the Forbes 2008 survey) talks, everyone listens.

True, Bair has taken or recommended actions during her tenure at the helm of the FDIC that have irked some bankers, such as pushing for foreclosure relief for homeowners—a move that many bankers see as shuffling too much of the responsibility for credit problems back onto their books. But compared to the kinds of decisions she has spoken out against—decisions that would have been more costly, more lasting, and harder to reverse over the long haul—measures like that look like a drop in the bucket. Besides, her support for mortgage relief was taken in the context of helping banks survive the crisis, argue some who have studied Bair's tenure at the FDIC. "Helping homeowners avoid default puts less pressure on banks' balance sheets in the midst of a toxic real estate market," argues one such analyst.

And Bair has been far harsher when it comes to some of the biggest and most systemically important banks, notably Citigroup. In the aftermath of the crisis, Bair not-so-privately expressed reservations about CEO Vikram Pandit's ability to streamline the company and clean up its balance sheet as rapidly as she believed was necessary. The bad blood between the two dated back to Bair's support for Wells Fargo's bid to acquire Wachovia in the fall of 2008—a bid that blindsided Pandit and others at Citi who had believed they already had an agreement in place to acquire Wachovia.

Over the months that have passed, the conflict between the two has gone from being at boiling point to merely a gentle simmer; still, Pandit is unlikely to lament her departure. Nor is Treasury Secretary Timothy Geithner, who, during the debate over financial reform, emerged as more of an advocate for allowing behemoths like Citi to remain giants while Bair advocated a policy that might have led to breaking apart institutions deemed "too big to fail."

At the heart of Bair's actions during her time at the FDIC has been a commitment to safeguarding the health and integrity of the organization itself and protecting the banking insurance fund it administers. When she took on the post in June 2006—appointed for a five-year term by then-President George W. Bush—the waters were calm and few anticipated the hurricane that was looming. Still, Bair was astute enough to recognize that the banking system wasn't prepared to withstand too much turmoil. To the extent that banks competed against each other to maintain the lowest possible capital levels (thus increasing leverage and, potentially, earnings), they were playing "a game with no winners," Bair warned anyone listening in a speech two years after her appointment and just as the financial crisis was beginning to take shape.

During that crisis, the FDIC oversaw the sale or closure of about 300 failed banks. Some of them—such as IndyMac or Washington Mutual—were large institutions or became household names. But the vast majority were small institutions, known only to residents in their local area—places like Bradenton, Florida; Alpharetta, Georgia; and Loup City, Nebraska. "In almost every bank-failure scenario, there has been an effort made by management and also sometimes by potential investors to shore the bank's capital up to the point where it could squeak by a little longer, just to keep it alive," says one Washington-based lawyer who has worked on issues involving small-bank regulation. With a handful of exceptions, however, Bair didn't cut them any slack—any financial institution, large or small, that had a hole in its balance sheet too big to fill and leave behind a newly stable bank simply didn't deserve a rescue package.

But Bair has been particularly alert to the dangers involved in treating all banks as if they were the same kind of entity. Even before the financial crisis hit, when the controversial topic of the day was still the overdraft fees being levied by banks, Bair made a point of explaining to smaller and regional banks that they weren't the targets of concern by policymakers and regulators. "I remember her pointing out to one gathering that included a lot of trade association in the Northeast that was chock-full of community banks that this was an opportunity for them to distinguish themselves" from their rivals who were charging excessive fees for overdrafts and other services, says one industry insider.

Another individual familiar with banking regulation under Bair's tenure credits her with arguing in favor of restrictions on nonbank institutions owning FDIC-guaranteed banks—a growing trend that was perceived as a competitive threat by smaller banks in particular.

Bair, a longtime Republican who made her Capitol Hill debut in 1981 as an aide to then-Senate Majority Leader Robert Dole (they're both from Kansas), hasn't always clung to the party line when pragmatism argued against it: She publicly declared her view that the initial bailout package proposed by the Bush administration wouldn't be enough to help struggling homeowners. That didn't erode her credibility with Republicans, however, even as Democrats respected the expertise she gleaned working for such varied bodies as the New York Stock Exchange, the Commodity Futures Trading Commission, and the Treasury Department, as well as in academia.

She received a Profile in Courage Award last year, in company with former CFTC chair Brooksley Born for trying to sound an early warning about the looming financial crisis, as well as a Liberian peace activist. "I'm particularly pleased to be joining two other female awardees who stood up when some of their male counterparts failed to act, or worse, actively fought them," Bair said on receiving her award from the John F. Kennedy Library Foundation.

When the crisis hit and some of the steps being proposed to restore health to financial institutions either disproportionately affected smaller banks or didn't make sense for that constituency, Bair showed that she was willing to speak out—always assuming that her criticisms or suggestions didn't jeopardize the overall health and well-being of the FDIC and its insurance fund.

The most obvious example of that was Bair's support for a lower special assessment on banks last year. Originally, the suggestion had been to levy a charge of 20 cents on every $100 of insured deposits, in an attempt to bring the insurance pool closer to pre-crash levels after a rash of failures. When community banks pointed out this would cripple their earnings and their viability, the FDIC eventually voted 4-1 to charge a fee of only 5 cents per $100 of assets, a move it calculated would still boost the FDIC pool (from which depositors in failed institutions are reimbursed) back to nearly $24 billion. At the time, Bair made the point that the new rule was "equitable" and didn't create an undue burden on any particular group.

A more controversial case in which Bair has used her credibility in the interests of smaller institutions came in the case of the Dodd-Frank Act, when she spoke out in favor of giving those banks exemption from some forms of direct oversight by the new consumer protection agency, pointing out that they were less systemically important and could be monitored effectively by other agencies.

She also supported allowing banks with less than $500 million in assets (and that don't get involved in nonbanking activities, like loan securitization or asset management, and that meet some other tests) to continue treating trust-preferred securities as Tier 1 capital. For many small institutions—especially those that are still mutually owned banks rather than banks owned by shareholders—that was crucial. "These are the only type of securities a mutual institution can sell to raise fresh capital without jeopardizing its status," points out one banking attorney.

Ask a dozen bankers from smaller institutions or community banks what they think of Sheila Bair and her tenure at the FDIC, and they'll likely come up with a laundry list of gripes. But most will also concede that she has been remarkably evenhanded as a regulator—and been attentive to the distinctive needs of smaller banks even during the worst banking crisis since the 1930s.

Even though her successor probably won't confront the tough issue of saving the entire banking system from collapse, he or she will find big shoes to fill. There are no hints yet on who that successor might be or what Bair plans to do next—although her CV includes a stint as an author of two children's books, Rock, Brock, and the Savings Shock and Isabel's Car Wash, both of which try to teach young children the importance of good money management.

Wherever her career path leads her, Bair is one of a tiny handful of individuals to emerge from the financial crisis with a stronger reputation and even—gasp—some moral authority. "She has credibility—and where she believed it to be appropriate and in the best interests of all concerned, she has used that on behalf of this group," says one unnamed Washington lawyer.

That sounds like the best kind of professional epitaph any Washington power player leaving center stage could possibly hope for.

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