Big Banks Need More Transparency, Fed Ex-Governor Says ARE the perils posed by too-big-to-fail banks a thing of the past? That's what we keep hearing from Washington. Politicians who wrote the Dodd-Frank law insist that it eliminates the dangers posed by large, politically connected financial institutions. At a news conference last week, Ben S. Bernanke, the chairman of the Federal Reserve, said that higher capital and greater liquidity requirements for big banks, combined with more watchful regulators, were making our financial giants stronger and less likely to require taxpayer backstops. Outside the Beltway, however, it is hardly clear that we've resolved this signal threat. Big banks are bigger than ever, and they exert enormous power over regulators and lawmakers. Increasingly, smaller institutions can't compete. So it was refreshing last week to hear Kevin M. Warsh, a former Fed governor, speak candidly and critically about the government backing that continues to support our largest banks. Equally refreshing were his prescriptions for eliminating the too-big-to-fail problem. "We cannot have a durable, competitive, dynamic banking system that facilitates economic growth if policy protects the franchises of oligopolies atop the financial sector," Mr. Warsh told an audience at the Stanford Law School on Wednesday night. "Those "interconnected" firms that find themselves dependent on implicit government support do not serve our economy's interest." Mr. Warsh, who is a distinguished visiting fellow at the Hoover Institution at Stanford and a lecturer at Stanford's Graduate School of Business, left government in 2011. His last position was at the Fed, where he was a governor for five years. Given his front-row Fed seat during the financial crisis, his views on preventing a repeat of it carry some weight. Put simply, Mr. Warsh does not believe that higher capital standards for banks and greater regulatory scrutiny will be enough to prevent future taxpayer-financed bailouts. "At core, I'm worried that the Dodd-Frank Act doubles down on regulators, gives upon markets and outsources capital requirements to an international standards group in Basel, Switzerland," he said in an interview last week. Importantly, none of these responses have moved us closer to "ridding the United States financial system of large, quasi-public utilities atop the sector," he said. Mr. Warsh does not prescribe breaking up giant institutions. Rather, he says their disclosures must be subject to new and ramped-up transparency requirements so investors can differentiate strength from weakness. "The Federal Reserve's most recent stress tests - particularly the enhanced disclosure - are a step in the right direction," he told his Stanford audience. Still, disclosure practices by the largest financial firms remain lacking, and the periodic reporting overseen by the Securities and Exchange Commission tends to obfuscate as much as inform. Regulators must require clearer and more expansive disclosures so that the financial statements and associated risks of large and complex companies can be assessed, Mr. Warsh said. If investors had more detailed information from these institutions, they would very likely sell their shares and debt if they took too many risks. This would hold the managers of these institutions accountable for reckless behavior by making them pay more to fund their businesses. But this powerful market force is ineffectual in a world where investors believe that the government will save faltering institutions. "Unfortunately, the Dodd-Frank Act has only reinforced the view that big and troubled banks will receive special government assistance," Mr. Warsh said in his speech. By sanctioning some list of too-big-to-fail firms - and treating them different than the rest - policy makers are signaling to markets that the government is vested in their survival. Mr. Warsh also questions our nation's participation in the Basel negotiations regarding bank capital requirements. He pointed out that many of the countries working alongside the United States on these rules back their banks more explicitly than we do. Therefore, their approach to capital standards is bound to vary greatly from ours. "My concern is that the negotiation, while well intended, is between banking systems that at their core are fundamentally different and aspire to fundamentally different things," he said. The largest banks in Japan, Germany, for example, have long been akin to national champions. Perhaps they reason that their banks need less capital than ours because their sovereigns more assuredly stand behind them. Our financial regulators, Mr. Warsh suggested, should work with countries that don't explicitly back their largest institutions. "We should work with them to instill real market discipline and real capital levels and do a more rigorous job on regulation," he said. Britain and Switzerland are two possible candidates for this joint effort, in large part because their banks are too big to be bailed out by their governments. CIRCLING back to the pernicious effects of large and politically interconnected banks, Mr. Warsh makes a direct link between the favors handed to these institutions and our disturbingly high unemployment rate. Small and medium-size banks, after all, are at a competitive disadvantage to the big guys, so they are less able to lend to companies of modest size, which do so much of the hiring in this country. "The policy has favored large global banks and disfavored small and medium-sized banks," he said. So I'm not surprised that real economic and job growth that should come from these enterprises is still lacking. Our failure to have a dynamic competitive banking system is a partial explanation for the weakness we are seeing. Granted, Mr. Warsh is far outnumbered by those arguing for the status quo and the continued hegemony of big banks. Many of those people, not surprisingly, work in Washington. But their refusal to concede that taxpayers remain imperiled by banks too big to succeed only ensures that we will face another financial crisis. And that it will come sooner, not later.