The former senior executive says the Fed must cut rates and guarantee deposits held by regional lenders.
The banking crisis could swallow another 50 regional lenders in the US if the country’s authorities don’t take appropriate steps to resolve structural issues, former vice-president at Lehman Brothers Lawrence McDonald has said in an interview with RIA Novosti.
“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,” he said.
The collapse of Lehman Brothers, which caused funding markets to seize up and made it hard for global lenders to get a hold of US dollars, marked the beginning of the global financial crisis in 2008.
According to McDonald, the current problems challenging the US banking sector are very similar to those preceding the infamous collapse of the financial giant.
The former executive added that US regional banks are expected to lose “hundreds of billions of dollars” with these funds inevitably moving to larger lenders, and then to treasury bonds.
The US authorities will have to heavily boost deposit guarantees compared to the existing ones, McDonald said.
On Tuesday, several media outlets reported that officials at the US Department of Treasury were discussing increasing deposit insurance in case of a deterioration in the banking sector. The step will reportedly require funds from the Treasury Department’s Exchange Stabilization Fund.
McDonald accused Federal Reserve Chairman Jerome Powell of following inadequate policies in tightening monetary policy.
“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,” the former banker suggested.
According to McDonald, the Fed will have to cut rates and then have a deposit guarantee, a larger one.
“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,” he concluded.