Banking Sector Regulatory Overhaul

at Bloomberg dot com slash podcast. We've just heard testimony in this morning from federal bank regulators in front of the Center Banking Committee's kind of the takeaways, one of them at least as being reported by Bloomberg suggesting that these there may be more bank regulations coming down the line. Let's get the latest on what's happening with some of these regional banks so that we can do that with Herman Chan, He's a regional bank analyst from Bloomberg Intelligence.

It's been our go to source here as we navigate through some of these issues. He's with Bloomberg Intelligence. He joins me here in our Bloomberg Interactive Broker studio. So, Herman, some of the regulators suggesting this morning and again in testimony in front of Congress that maybe even more bank regulations are needed. And we've heard the bankers on the largest banks Jamie Diamond most notably complaining about all the regulations post you know, two thousand and eight that the

industry has had to deal with. Do you think there will will be more regulations coming to maybe some of those smaller, more regional banks. Yeah. I think that's the natural response to what's happened with the fallout from SVB in Signature. These smaller banks will need to be more

tightly regulated. Remember, the US regulatory system for banks now is a bit tiered, where the largest too big to fail banks have the most onerous capital and liquidity regulations and requirements, and as you get smaller in size, those requirements are lessened. So the natural response I think from regulators is to tighten up those regulations for the banks at as low as one hundred billion dollars in assets, which would you know, in hindsight, would have captured banks

like SVB and Signature with higher regulatory requirements. What about the cost associated with that? I mean, it's one thing for a JP Morgan, a Bank of America to have to you know, fund those types of investments in controls and regulations, how about so many smaller banks? Yeah? I think the upshot is that profitability will be weekend. You're going to already incur costs by refilling the oppositive insurance fund.

You've got twenty billion dollars in losses from SEB twenty two and a half billion losses from signatures, So that's going to come out of the regional banks and the largest banks coffers. You've got expectations that liquidity requirements will increase. You've got expectations that these banks will have to issue some more debt for loss absorbing capital purposes. So all that put together means some weaker profitability for banks going forward.

What are investors telling you? Are they just running away from this group? Are they trying to pick the winners and losers the relatively stronger banks out there? Right? The backdrop is still a bit uncertain, So you've got that going on. But there are some folks that are looking at some of these banks that have been winners so far, the banks like c I T that I'm sorry, like First Citizens that that recently announced the purchase of SBB. You've got a New York Community that recently made the

purchase of assets and deposits from from Signature. So there are some winners, and there's still some some folks that are still known as as areas and ports of strength banks like M and T and PNC and regions that are are less affected by the the shenanigans that happened with SBB and signature. So there are some some pockets I think that where that some investors are looking at

right now. So what surprised me at that at the beginning of this Silicon Valley Bank story was my realization that it's the sixth It was the sixteenth largest bank in the US. Right. That shocked me because I'd heard of it because it's a tech but I figured it was just a regional, but it was big. Are there

other names out there that you know? Do you think they're regulations saying, oh boy, if a sixteenth largest bank could be in trouble, we need to start looking at number seventeen, eighteen nineteen that kind of thing, right, And I think that's what these regulations are intended to do, is to bring the tighter regulatory grip on the bank the sixteen seventeen, eighteen, nineteen twenty into maybe twenty five or thirty largest banks in the US. So we don't

have this sort of scenario happen again. But I think regulators also need to sharpen what they're really trying to fight here, right, because higher capital ratios isn't going to do the trick. Right. This wasn't a capital issue, this was a liquidity issue. And there were less concrete answers from regulators today in the testimony about what they could do to really tighten the regulatory aspect of liquidity. It

seems like part of it. And I think some of the senators are trying to get to this point today, which is, you know, this is more of a regulatory mistake, if you will, an error and not seen and not looking at the balance sheet of SVB, for example, and just seeing all those assets held the maturity a big number versus the level of deposits, and right, the risk that that now isn't that kind of bank regulation one on one, Yeah, you would think so, right, Yeah, it's

something that interest rate risk is the bread and butter of how you manage a bank. And it seems like there were there from the testimony today. The regulators in California, the state of California regulators were looking more closely with SBB, but there was not enough action by both regulators and the management team to to really rectify the issues that

were that were highlighted by by the regulatory folks. So that's one and I think the other issue is that nobody really articulated or really understood the aspects of deposit flight and deposit flight, particularly for insured, large, chunky commercial deposits, and that's something that really needs to be focused on with respect to how fast these things can leave the bank and the balance sheets of banks, especially in the age of social media where you have a herd mentality,

and also with in this age of digital banking, where folks can move their money. That's a big thing. Like I've learned just you know, I've up to my digital banking game a lot over the pandemic and the ability to wire funds, transfer funds, and you know, there's obviously daily limits and someone, but you can move money so much faster and so much more easily. Literally from your phone, sitting on your couch, you can move you know. It's it's just amazing that I'm not sure how you regulate

that other than putting some limits on it. But the big question, or a big question I have for you, is there and I learned this kind of comparing, contrasting what's happened in the US versus what happened in Switzerland and coming to recognize that Europeans countries have far fewer banks than you do. We've got all these regional banks.

How many banks in the country five four or five thousand? Okay, So you go into any town, USA and there's a local bank, there's a Satan's Alane or something or whatever. How are those regular Is that still the FDIC is going to go down to that small of a community bank. No, I think those folks, those smaller community banks that serve your local town is not going to be affected by

any of these more tight and more strenuous regulations. It's really going to be the banks that are going to be above one hundred billion dollars in assets, maybe down to fifty billion in assets if if the FED wants to be more drastic with their measures. But these smaller regional banks, they are not too big to fail. Right If a local town bank in in ABC town in rural Ohio, that's not going to be a systemic issue that's going to affect the overall infrastructure of the industry.

Whereas SBB. As we've seen, we've now realized that the sixteenth largest bank in the US can have wide ramifications for the industry. Looking forward here, one of the concerns for I would think small and mid sized businesses is getting access to growth capital from my local regional bank. That's been my partner. But I see my regional bank they've had a lot of deposits withdrawn. Maybe they're going

to money market accounts. Who knows where they're going. Is there a concern that credit will become tighter for the small business owner, may be more expensive that type of thing, at least in the near term, right, I think that's the knock on effect potentially for what the issues with the SBB and signature fallout. Regional banks will have to both raise their costs of their funding because they want

to keep their deposits in house. So one way to entice your depositors to stay is to raise the interest rate that you're giving to these depositors. That has an effect on banks margins. So if your funding costs arise, then you probably have to increase the lending rates to

make that same spread you were making three weeks ago. Right, So the cost of credit is going to rise, and the credit availability could decline because banks are going to be more aware of how they're lending in this environment where a potential session that's coming down the road, and they want to be more conservative with how they lend.

So those factors will have ramifications for the economy. And are you so I'm looking at your former employer, M ANDT Bank because I've I've identified that as a quality, high quality regional bank. Okay, that's my analysis. It's still

down seventeen percent this year. I mean even the quality banks out there, the ones that are not part of Silicon Valley, part or even part of that business customer base, you know that you might see, like some of the other banks that are being challenged right now, that's still down. So if you're an MT bank, you just got to put your head down and keep doing your business right right right. You really can't control what the stock price

is doing. The market is going to be the markets, and you're really focused on banking your core customers and doing what you've always been doing, having a very conservative risk profile across credit, interest rate, risk, capital, etc. So the banks that are strong will continue to be doing what they're doing and they'll find spots to grow their organization, maybe through M and A, but it's going to be a slow growth profile across the industry given where we

are with interest rates and the inverted curve. And for just MT they're gonna report their next quarterly earnings April seventeen, so you can have your bank earnings coming out starting in a couple of weeks. What do you expect to hear? What are the questions you're going to ask? What do you think one of some of the tough questions when you get on those investor calls, people are going to ask about these bank managers. It just simply how sound is your bank? I mean, we can see the balance sheet,

but what do you want to hear from management? I want to hear how sturdy their deposits were over the course of these last three weeks. Were you having more conversations with your commercial clients about moving about those clients moving their posits out. How much are you paying for your incremental deposits that you're that are coming in the door. How much as as a measure of caution and current services?

And how much did you tap the FED discount window in these emergency liquidity measures to prepare against some liquidity outflow from your depositors. So those are all the questions that I think investors should be focused on the resiliency of the deposit base and how stable they can be in this moment of potential stress. And they will also disclose kind of loan growth, right are they are they

in fact loaning out money? Because if they're not loaning the money, then I would say, oh, maybe they're concerned about that deposit base, right exactly. I think overall loan growth is going to be a bit slower going forward, and you should really see that in the first quarter numbers. Okay, so I guess the is there a list out there that people have I'm really worried about these regional banks. Yeah, I guess the ones that are continued to be circled

from a market standpoint and things. I would say things have quieted down a bits based on the market reactions to these names over the past a few days. But First Republic is going to be the one that I think investments are focused on in terms of how much deposit outflow they have and how are they going to manage that company going forward if they're going to be remain solvent. So that's the biggest question, the big one right interesting because it stocks down another four percent today,

down to almost ninety percent this year. And this is a company that says we want to try to, you know, make it on our own here, so I'll have to pay attention to that. Herman Chin, thanks once again for joining us, getting again us the update on all things regional banks. He's been absolutely indispensable, I know, to Bloomberg Radio, Television, Bloomberg News as we try to navigate the what has

become a significant issue for this marketplace. So Hermit Chin covers the regional banks for Bloomberg Intelligence, joining us here on our Bloomberg Interactive Broker Studio. Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews an Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller nineteen seventy three. And I'm Fall Sweeney. I'm on Twitter at

pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio