El-Arian says US banks need ‘circuit breaker’ after turmoil

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(Bloomberg) — Mohamed El-Arian says the latest turmoil surrounding First Republic Bank will make banks rethink their standards and brace for tougher regulation.

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“You have an accident on a freeway and the immediate response is to lower the speed limit,” El-Arian, economic advisor at Allianz SE and Bloomberg Opinion columnist, said on Bloomberg television on Friday. “Hopefully you better tighten your lending standards, for your own reasons and because there’s going to be more regulation coming your way.”

Tighter and more expensive bank lending is likely to disproportionately burden smaller, lower-quality borrowers, Morgan Stanley said in a Thursday report.

El-Arian said the recent turmoil caused by banks could eventually push inflation down, but not in the the Federal expects. Nevertheless, the central bank may soften its stance during its meeting next week, he said.

“This Fed will be very tempted to try and somehow be in the middle and say ‘we will not raise rates, but this is a pause, this is not the end of the cycle’,” he said. “I think it’s wrong to do that.”

US credit markets rose on Thursday and major stock indexes rose after big banks including JPMorgan Chase & Co and Citigroup Inc extended a lifeline to First Republic. But sentiment again on Friday as investors braced themselves for the Fed’s policy decision next week and continued to grapple with turmoil in the banking sector.

“It’s a multi-month episode and it’s not just on the financial side, it’s more important on the economic side,” El-Arian said. “Even if we are able to resolve these aftershocks in the next few days – and I really hope we can – we need a circuit breaker.”

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