Meredith Whitney, Founder and CEO of Meredith Whitney LLC, tells Yahoo Finance's Jennifer Schonberger at the Yahoo Finance Invest conference that recent regional bank failures stem from issues like interest rate mismanagement and "faith-based" bank runs. Whitney believes financial markets rely on faith, and "when investors lose faith, the institution doesn't survive."

Whitney notes big banks face higher capital requirements, causing them to cease consumer lending, shifting it to non-bank enterprises. This raises concerns, as non-bank institutions lack mandates to reinvest in underserved areas that current community reinvestment acts require for banks.

Whitney stresses regulators should reevaluate policies that may be depriving vulnerable communities of needed investment.

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Video Transcript

JENNIFER SCHONBERGER: How are the banks' balance sheets now? Have they been doing the hard work to bolster their balance sheets as interest rates have gone up so that we won't see a repeat of the regional bank failures that we saw earlier this spring?

MEREDITH WHITNEY: Well, I think the regional bank failures were specific to interest rate mismanagement, asset liability management. And another issue where-- I mean, Silicon Valley was hiding in plain sight. I mean, there was no secret to it. Going into the fourth quarter, there was no secret to what was on their balance sheet. And I think that what caused the demise of Silicon Valley was something that I call a faith-based run on the bank.

So any financial market is a faith-based system. And when investors lose faith, you know, the institution doesn't survive. So bank balance sheets today are-- and this is important, too, because if you look at the biggest banks that used to be the biggest consumer lenders, all of those that have been under higher capital standards have basically ceded their involvement in consumer lending to non-bank players. And so more of the activity has moved off-bank balance sheets.

Now, the new 16 banks that are ring-fenced in terms of over $100 billion in assets that will have higher capital standards, you're going to take even more money away from basic lending into non-regulated entities. And how that-- so to say about bank balance sheets, there are more security's interest rate variable than credit variable. And in 2007/2008, it was a credit variable thing.

The economy is just totally different because the consumer is under-levered, the banks are basically securities, warehouses. And what that means for the economy is-- and I think this is an important point. If Basel III Endgame goes through, and as the 16 banks-- new banks that are ring-fenced with over $100 billion in assets, you're going to have more and more lending go outside of the banking industry.

Now, outside of the banking industry means that there's no Community Reinvestment Act that mandates that they have to reinvest in low-income areas or rural areas. So you're going to see capital come out of those areas. And that is-- that's truly upsetting because you want to enable as many people to be a part of the banking system as possible. And I think that's an unintended consequence that the regulators really need to think about.