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Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside

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Speaker 1: my co host Matt Miller. Every business day, we bring

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Speaker 1: you interviews from CEOs, market pros, and Bloomberg experts, along

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Speaker 1: with essential market moving news. Find the Bloomberg Markets Podcast

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Speaker 1: on Apple Podcasts or wherever you listen to podcasts, and

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Speaker 1: at Bloomberg dot com slash podcast. We've just heard testimony

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Speaker 1: in this morning from federal bank regulators in front of

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Speaker 1: the Center Banking Committee's kind of the takeaways, one of

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Speaker 1: them at least as being reported by Bloomberg suggesting that

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Speaker 1: these there may be more bank regulations coming down the line.

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Speaker 1: Let's get the latest on what's happening with some of

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Speaker 1: these regional banks so that we can do that with

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Speaker 1: Herman Chan, He's a regional bank analyst from Bloomberg Intelligence.

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Speaker 1: It's been our go to source here as we navigate

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Speaker 1: through some of these issues. He's with Bloomberg Intelligence. He

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Speaker 1: joins me here in our Bloomberg Interactive Broker studio. So, Herman,

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Speaker 1: some of the regulators suggesting this morning and again in

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Speaker 1: testimony in front of Congress that maybe even more bank

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Speaker 1: regulations are needed. And we've heard the bankers on the

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Speaker 1: largest banks Jamie Diamond most notably complaining about all the

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Speaker 1: regulations post you know, two thousand and eight that the

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Speaker 1: industry has had to deal with. Do you think there

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Speaker 1: will will be more regulations coming to maybe some of

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Speaker 1: those smaller, more regional banks. Yeah. I think that's the

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Speaker 1: natural response to what's happened with the fallout from SVB

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Speaker 1: in Signature. These smaller banks will need to be more

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Speaker 1: tightly regulated. Remember, the US regulatory system for banks now

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Speaker 1: is a bit tiered, where the largest too big to

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Speaker 1: fail banks have the most onerous capital and liquidity regulations

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Speaker 1: and requirements, and as you get smaller in size, those

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Speaker 1: requirements are lessened. So the natural response I think from

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Speaker 1: regulators is to tighten up those regulations for the banks

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Speaker 1: at as low as one hundred billion dollars in assets,

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Speaker 1: which would you know, in hindsight, would have captured banks

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Speaker 1: like SVB and Signature with higher regulatory requirements. What about

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Speaker 1: the cost associated with that? I mean, it's one thing

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Speaker 1: for a JP Morgan, a Bank of America to have

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Speaker 1: to you know, fund those types of investments in controls

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Speaker 1: and regulations, how about so many smaller banks? Yeah? I

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Speaker 1: think the upshot is that profitability will be weekend. You're

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Speaker 1: going to already incur costs by refilling the oppositive insurance fund.

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Speaker 1: You've got twenty billion dollars in losses from SEB twenty

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Speaker 1: two and a half billion losses from signatures, So that's

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Speaker 1: going to come out of the regional banks and the

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Speaker 1: largest banks coffers. You've got expectations that liquidity requirements will increase.

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Speaker 1: You've got expectations that these banks will have to issue

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Speaker 1: some more debt for loss absorbing capital purposes. So all

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Speaker 1: that put together means some weaker profitability for banks going forward.

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Speaker 1: What are investors telling you? Are they just running away

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Speaker 1: from this group? Are they trying to pick the winners

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Speaker 1: and losers the relatively stronger banks out there? Right? The

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Speaker 1: backdrop is still a bit uncertain, So you've got that

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Speaker 1: going on. But there are some folks that are looking

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Speaker 1: at some of these banks that have been winners so far,

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Speaker 1: the banks like c I T that I'm sorry, like

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Speaker 1: First Citizens that that recently announced the purchase of SBB.

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Speaker 1: You've got a New York Community that recently made the

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Speaker 1: purchase of assets and deposits from from Signature. So there

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Speaker 1: are some winners, and there's still some some folks that

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Speaker 1: are still known as as areas and ports of strength

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Speaker 1: banks like M and T and PNC and regions that

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Speaker 1: are are less affected by the the shenanigans that happened

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Speaker 1: with SBB and signature. So there are some some pockets

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Speaker 1: I think that where that some investors are looking at

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Speaker 1: right now. So what surprised me at that at the

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Speaker 1: beginning of this Silicon Valley Bank story was my realization

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Speaker 1: that it's the sixth It was the sixteenth largest bank

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Speaker 1: in the US. Right. That shocked me because I'd heard

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Speaker 1: of it because it's a tech but I figured it

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Speaker 1: was just a regional, but it was big. Are there

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Speaker 1: other names out there that you know? Do you think

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Speaker 1: they're regulations saying, oh boy, if a sixteenth largest bank

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Speaker 1: could be in trouble, we need to start looking at

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Speaker 1: number seventeen, eighteen nineteen that kind of thing, right, And

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Speaker 1: I think that's what these regulations are intended to do,

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Speaker 1: is to bring the tighter regulatory grip on the bank

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Speaker 1: the sixteen seventeen, eighteen, nineteen twenty into maybe twenty five

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Speaker 1: or thirty largest banks in the US. So we don't

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Speaker 1: have this sort of scenario happen again. But I think

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Speaker 1: regulators also need to sharpen what they're really trying to

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Speaker 1: fight here, right, because higher capital ratios isn't going to

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Speaker 1: do the trick. Right. This wasn't a capital issue, this

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Speaker 1: was a liquidity issue. And there were less concrete answers

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Speaker 1: from regulators today in the testimony about what they could

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Speaker 1: do to really tighten the regulatory aspect of liquidity. It

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Speaker 1: seems like part of it. And I think some of

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Speaker 1: the senators are trying to get to this point today,

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Speaker 1: which is, you know, this is more of a regulatory mistake,

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Speaker 1: if you will, an error and not seen and not

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Speaker 1: looking at the balance sheet of SVB, for example, and

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Speaker 1: just seeing all those assets held the maturity a big

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Speaker 1: number versus the level of deposits, and right, the risk

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Speaker 1: that that now isn't that kind of bank regulation one

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Speaker 1: on one, Yeah, you would think so, right, Yeah, it's

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Speaker 1: something that interest rate risk is the bread and butter

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Speaker 1: of how you manage a bank. And it seems like

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Speaker 1: there were there from the testimony today. The regulators in California,

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Speaker 1: the state of California regulators were looking more closely with SBB,

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Speaker 1: but there was not enough action by both regulators and

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Speaker 1: the management team to to really rectify the issues that

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Speaker 1: were that were highlighted by by the regulatory folks. So

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Speaker 1: that's one and I think the other issue is that

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Speaker 1: nobody really articulated or really understood the aspects of deposit

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Speaker 1: flight and deposit flight, particularly for insured, large, chunky commercial deposits,

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Speaker 1: and that's something that really needs to be focused on

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Speaker 1: with respect to how fast these things can leave the

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Speaker 1: bank and the balance sheets of banks, especially in the

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Speaker 1: age of social media where you have a herd mentality,

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Speaker 1: and also with in this age of digital banking, where

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Speaker 1: folks can move their money. That's a big thing. Like

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Speaker 1: I've learned just you know, I've up to my digital

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Speaker 1: banking game a lot over the pandemic and the ability

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Speaker 1: to wire funds, transfer funds, and you know, there's obviously

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Speaker 1: daily limits and someone, but you can move money so

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Speaker 1: much faster and so much more easily. Literally from your phone,

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Speaker 1: sitting on your couch, you can move you know. It's

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Speaker 1: it's just amazing that I'm not sure how you regulate

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Speaker 1: that other than putting some limits on it. But the

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Speaker 1: big question, or a big question I have for you,

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Speaker 1: is there and I learned this kind of comparing, contrasting

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Speaker 1: what's happened in the US versus what happened in Switzerland

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Speaker 1: and coming to recognize that Europeans countries have far fewer

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Speaker 1: banks than you do. We've got all these regional banks.

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Speaker 1: How many banks in the country five four or five thousand? Okay,

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Speaker 1: So you go into any town, USA and there's a

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Speaker 1: local bank, there's a Satan's Alane or something or whatever.

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Speaker 1: How are those regular Is that still the FDIC is

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Speaker 1: going to go down to that small of a community bank. No,

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Speaker 1: I think those folks, those smaller community banks that serve

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Speaker 1: your local town is not going to be affected by

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Speaker 1: any of these more tight and more strenuous regulations. It's

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Speaker 1: really going to be the banks that are going to

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Speaker 1: be above one hundred billion dollars in assets, maybe down

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Speaker 1: to fifty billion in assets if if the FED wants

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Speaker 1: to be more drastic with their measures. But these smaller

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Speaker 1: regional banks, they are not too big to fail. Right

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Speaker 1: If a local town bank in in ABC town in

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Speaker 1: rural Ohio, that's not going to be a systemic issue

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Speaker 1: that's going to affect the overall infrastructure of the industry.

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Speaker 1: Whereas SBB. As we've seen, we've now realized that the

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Speaker 1: sixteenth largest bank in the US can have wide ramifications

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Speaker 1: for the industry. Looking forward here, one of the concerns

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Speaker 1: for I would think small and mid sized businesses is

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Speaker 1: getting access to growth capital from my local regional bank.

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Speaker 1: That's been my partner. But I see my regional bank

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Speaker 1: they've had a lot of deposits withdrawn. Maybe they're going

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Speaker 1: to money market accounts. Who knows where they're going. Is

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Speaker 1: there a concern that credit will become tighter for the

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Speaker 1: small business owner, may be more expensive that type of thing,

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Speaker 1: at least in the near term, right, I think that's

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Speaker 1: the knock on effect potentially for what the issues with

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Speaker 1: the SBB and signature fallout. Regional banks will have to

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Speaker 1: both raise their costs of their funding because they want

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Speaker 1: to keep their deposits in house. So one way to

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Speaker 1: entice your depositors to stay is to raise the interest

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Speaker 1: rate that you're giving to these depositors. That has an

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Speaker 1: effect on banks margins. So if your funding costs arise,

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Speaker 1: then you probably have to increase the lending rates to

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Speaker 1: make that same spread you were making three weeks ago. Right,

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Speaker 1: So the cost of credit is going to rise, and

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Speaker 1: the credit availability could decline because banks are going to

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Speaker 1: be more aware of how they're lending in this environment

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Speaker 1: where a potential session that's coming down the road, and

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Speaker 1: they want to be more conservative with how they lend.

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Speaker 1: So those factors will have ramifications for the economy. And

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Speaker 1: are you so I'm looking at your former employer, M

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Speaker 1: ANDT Bank because I've I've identified that as a quality,

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Speaker 1: high quality regional bank. Okay, that's my analysis. It's still

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Speaker 1: down seventeen percent this year. I mean even the quality

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Speaker 1: banks out there, the ones that are not part of

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Speaker 1: Silicon Valley, part or even part of that business customer base,

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Speaker 1: you know that you might see, like some of the

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Speaker 1: other banks that are being challenged right now, that's still down.

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Speaker 1: So if you're an MT bank, you just got to

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Speaker 1: put your head down and keep doing your business right

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Speaker 1: right right. You really can't control what the stock price

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Speaker 1: is doing. The market is going to be the markets,

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Speaker 1: and you're really focused on banking your core customers and

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Speaker 1: doing what you've always been doing, having a very conservative

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Speaker 1: risk profile across credit, interest rate, risk, capital, etc. So

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Speaker 1: the banks that are strong will continue to be doing

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Speaker 1: what they're doing and they'll find spots to grow their organization,

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Speaker 1: maybe through M and A, but it's going to be

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Speaker 1: a slow growth profile across the industry given where we

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Speaker 1: are with interest rates and the inverted curve. And for

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Speaker 1: just MT they're gonna report their next quarterly earnings April seventeen,

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Speaker 1: so you can have your bank earnings coming out starting

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Speaker 1: in a couple of weeks. What do you expect to hear?

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Speaker 1: What are the questions you're going to ask? What do

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Speaker 1: you think one of some of the tough questions when

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Speaker 1: you get on those investor calls, people are going to

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Speaker 1: ask about these bank managers. It just simply how sound

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Speaker 1: is your bank? I mean, we can see the balance sheet,

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Speaker 1: but what do you want to hear from management? I

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Speaker 1: want to hear how sturdy their deposits were over the

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Speaker 1: course of these last three weeks. Were you having more

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Speaker 1: conversations with your commercial clients about moving about those clients

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Speaker 1: moving their posits out. How much are you paying for

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Speaker 1: your incremental deposits that you're that are coming in the door.

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Speaker 1: How much as as a measure of caution and current services?

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Speaker 1: And how much did you tap the FED discount window

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Speaker 1: in these emergency liquidity measures to prepare against some liquidity

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Speaker 1: outflow from your depositors. So those are all the questions

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Speaker 1: that I think investors should be focused on the resiliency

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Speaker 1: of the deposit base and how stable they can be

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Speaker 1: in this moment of potential stress. And they will also

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Speaker 1: disclose kind of loan growth, right are they are they

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Speaker 1: in fact loaning out money? Because if they're not loaning

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Speaker 1: the money, then I would say, oh, maybe they're concerned

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Speaker 1: about that deposit base, right exactly. I think overall loan

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Speaker 1: growth is going to be a bit slower going forward,

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Speaker 1: and you should really see that in the first quarter numbers. Okay,

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Speaker 1: so I guess the is there a list out there

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Speaker 1: that people have I'm really worried about these regional banks. Yeah,

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Speaker 1: I guess the ones that are continued to be circled

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Speaker 1: from a market standpoint and things. I would say things

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Speaker 1: have quieted down a bits based on the market reactions

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Speaker 1: to these names over the past a few days. But

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Speaker 1: First Republic is going to be the one that I

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Speaker 1: think investments are focused on in terms of how much

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Speaker 1: deposit outflow they have and how are they going to

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Speaker 1: manage that company going forward if they're going to be

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Speaker 1: remain solvent. So that's the biggest question, the big one

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Speaker 1: right interesting because it stocks down another four percent today,

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Speaker 1: down to almost ninety percent this year. And this is

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Speaker 1: a company that says we want to try to, you know,

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Speaker 1: make it on our own here, so I'll have to

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Speaker 1: pay attention to that. Herman Chin, thanks once again for

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Speaker 1: joining us, getting again us the update on all things

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Speaker 1: regional banks. He's been absolutely indispensable, I know, to Bloomberg Radio, Television,

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Speaker 1: Bloomberg News as we try to navigate the what has

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Speaker 1: become a significant issue for this marketplace. So Hermit Chin

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Speaker 1: covers the regional banks for Bloomberg Intelligence, joining us here

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Speaker 1: on our Bloomberg Interactive Broker Studio. Thanks for listening to

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Speaker 1: the Bloomberg Markets podcast. You can subscribe and listen to

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Speaker 1: interviews an Apple Podcasts or whatever podcast platform you prefer.

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Speaker 1: I'm Matt Miller. I'm on Twitter at Matt Miller nineteen

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Speaker 1: seventy three. And I'm Fall Sweeney. I'm on Twitter at

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Speaker 1: pt Sweeney. Before the podcast, you can always catch us

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Speaker 1: worldwide at Bloomberg Radio