Former Fed Official Kevin Warsh Sees More Pain For Banks, Pushes 2 Ideas To Stem Another Financial Crisis

Economist and gold bull Peter Schiff recently warned the U.S. banking crisis was not yet over. Throughout the year, three mid-sized regional banks collapsed, and more are speculated to be teetering on the brink. Now, economist and former Federal Reserve board member Kevin Warsh offered his insights on how to avert a repeat of the 2007-09 financial crisis. 

What Happened: The U.S. banking system is at a critical juncture and in the absence of a policy change, it will likely go through a slowdown and stagnation, potentially requiring explicit government support, Warsh wrote in an opinion piece for the Wall Street Journal.

"This is bad for everyone except America's adversaries," be warned. 

The recent crisis among regional banks deepened the divide between smaller and mid-sized banks and the “too big to fail” banks, noted Warsh. 

The collapse of First Republic and Silicon Valley Bank increased the dominance of larger banks, granting them greater access to low-cost deposits. 

See Also: Best Regional Bank Stocks

Policy Cops To Blame: Warsh criticized the regulatory policies of past decades for weakening competition and the resilience of the banking industry. He also highlighted the detrimental impact of massive debt-financed government spending on the industry’s growth prospects. 

Additionally, he mentioned that the Federal Reserve’s “belated ad hoc measures” to combat inflationary pressure had repercussions on overall financial stability. 

Warsh observed that the government’s interventions, including backstopping all deposits, providing emergency liquidity, and supporting bank assets, created a false sense of normalcy. 

He viewed Treasury Secretary Janet Yellen‘s statement that the tumult was largely resolved and the banking system was safe and sound as “ritualistic” rather than “revelatory.” 

Looking ahead, Warsh cautioned that if problems in the commercial real estate market led to a repricing of other assets, more banks would face liquidity crunches and struggle to maintain adequate capital. 

He called upon Yellen and policymakers on the Financial Stability Oversight Council to take immediate action to reduce risks.

His recommendations included promoting private recapitalization, allowing consolidation among banks, and preapproving capital from asset managers and private equity firms, provided their involvement was passive and governance rights were limited. 

Price Action: In premarket trading on Monday, the SPDR S&P Regional Banking ETF KRE climbed 1.13% to $43.95, according to Benzinga Pro data.

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