Fed’s Kashkari Warns Bank Troubles Not Over

The President of the Federal Reserve Bank of Minneapolis, Neel Kashkariwarned that although it may seem that the worst of the banking sector tensions is over, history shows that more problems cannot be ruled out.

“It is too early to say that everything is behind us” and argue that actions by the Fed, Treasury and other regulators have stemmed the wave of bank troubles that erupted in March, Kashkari said in an interview with Reuters on Monday.

That sense of caution is fueled by his experience as a government official involved in helping resolve the financial crisis of more than a decade ago.

Kashkari, who became head of the Minneapolis Fed in 2016, served in the US Treasury Department from 2006 to 2009, and in 2008 headed the Troubled Asset Relief Program, which used government money to help stabilize the banking system.

The year he took over that program was the height of the crisis, culminating in the bankruptcy of the investment bank Lehman Brothers in September 2008. Leading up to that moment of crisis there were moments that made believers believe. observers that the worst was over.

“What happened in 2008 stuck with me”said Kashkari, who recalled that the investment bank Bear Stearns collapsed in March of that year, and noted: “A couple of months passed and we thought that was the worst. And then obviously things got a lot worse from there.”

The global financial system was rocked in March by the failure of two banks in California, raising questions about how banks, especially regional ones, were following the central bank’s aggressive path of rate hikes begun in March 2022.

Banking problems prompted the Fed to inject substantial amounts of liquidity into the financial system, and while lending has receded since March, the central bank was still lending just over $300 billion on Thursday, a number that dwarfs what lent directly to banks in 2008, during the worst phase of the financial crisis.

“Banks and the banking system are strong and resilient and are well positioned to deal with any challenges they may face, now or in the future”Fed Chairman Jerome Powell said Friday.

But for Kashkari, it’s too early to say the banks are out of the woods.

Still, he praised the Fed’s response to the problems: “I think we got it pretty much right, in terms of being able to deal with the mark-to-market losses that (the banks) were dealing with.”

Source: Reuters