Another 50 regional banks in the US could fail in the US banking crisis if authorities do not take immediate action to resolve structural issues in the sector, according to former vice-president at Lehman Brothers Lawrence McDonald, in an interview with RIA Novosti.
He said, “Policy-makers will most likely be forced to introduce a much larger withholding to maintain outflows of deposits from bank accounts that significantly exceed $250,000.”
The global financial crisis of 2008 began with the collapse of Lehman Brothers, which seized up funding markets, and prevented global lenders from getting ahold of US dollars.
McDonald says the problems today are very similar to the problems which preceded the collapse of Lehman and triggered the 2008 financial crisis.
He added that now it is expected US regional banks will lose “hundreds of billions of dollars” in deposits, as those funds are moved out to larger lenders believed to be “too big to fail,” as well as more secure US Treasuries.
He noted US authorities will have to massively increase the guarantees to US deposits over the present guarantees.
Several media outlets reported on Tuesday that US authorities at the Department of Treasury were considering increasing deposit insurance in the event of a deterioration of the US banking sector. They were discussing using funds from the department’s Exchange Stabilization Fund to do so.
In addition, McDonald accused Federal Reserve Chairman Jerome Powell of failing to effectively manage the tightening of monetary policy.
He went on, “They seem to be smoking in a dynamite shed. Ten days ago, Powell on Capitol Hill told us that the banking system was OK… He either lied or did not understand what he was doing.”
McDonald went on to assert that the Federal Reserve will eventually have no choice but to begin cutting rates, and in addition it will have to increase the size of the present deposit guarantee, to prevent larger deposits from fleeing regional lenders.
He concluded, “That’s what they’re going to come up with… That’s a bailout. That’s basically the federal government taking on bank-deposit risk.”