Banking regulation: ‘There’s a chance that enhanced supervision will come down,’ analyst says

CFRA Research Equity Analyst Alexander Yokum joins Yahoo Finance Live to discuss banking regulation. This comes after the reassurance of Treasury Secretary Janet Yellen, despite regional bank failures.

Video Transcript

DAVE BRIGGS: First Republic doing a complete 180 today from Monday, now leading a rally of the regional banks. You see it's now up over 30% in the last hour of trading. This comes after reports of another JPMorgan-led rescue plan for the bank and a speech from Treasury Secretary Janet Yellen this morning at the American Bankers Association. She talked about the state of our banking system and plans to monitor institutions going forward. Listen.

JANET YELLEN: The public should have confidence in our banking system, and it's our intention to remain vigilant in the days and weeks to come.

Our intervention was necessary to protect the broader US banking system, and similar actions could be warranted if smaller institutions suffered deposit runs that pose the risk of contagion.

DAVE BRIGGS: Joining us now is Alexander Yokum, CFRA Research equity analyst. Good to see you. So are those statements in contrast to one another, faith in the system, which is secure, but yet we're poised for further action if needed?

ALEXANDER YOKUM: Yeah, I mean, I would say just in general the comments were quite positive. I think that's why you're seeing regional banks outperforming today. I mean, there is some concern about the health of the banking system, but I think the large concerns about a bank run are largely behind us. Two Sundays ago, you know, we had the comments that uninsured deposits would be made whole at Signature Bank and Silicon Valley Bank, and I think those comments took a few days to kind of go through. But at this point, I think people have calmed down a little bit.

SEANA SMITH: So Alexander, you don't necessarily think that we will see more runs on the bank because some of the regionals, yes, we are seeing, I guess, some reassurance today, but they have certainly been on a wild ride here over the last two weeks.

ALEXANDER YOKUM: Yeah, so I'm a little bit less concerned about a full-fledged bank run. I think the fact that the banking industry has kind of helped out First Republic so much-- but that being said, I would expect some deposits to move from regional banks to large banks. I am also concerned about profitability. Potentially will have higher regulatory costs for smaller banks, and then potentially deposit costs will go up.

From 2019 to 2021, we had excess deposits. Banking deposits went up 40%. But given the recent news, I expect deposits to now be much more valuable, and therefore banks will probably have to pay more on those deposits, and that will impact profitability. And I would expect that to be more for the regional banks than the larger banks.

DAVE BRIGGS: Secretary Yellen also mentioned the need to rethink banking regulations. Let's listen to what she said there.

JANET YELLEN: We will need to re-examine our current regulatory and supervisory regimes and consider whether they are appropriate for the risk that banks face today.

DAVE BRIGGS: What's your expectation on the regulatory environment? Is there anything they can do without congressional approval, which seems at best unlikely at this juncture?

ALEXANDER YOKUM: Yeah, so I definitely think there's a chance that enhanced supervision comes down. So before this, it was $250 billion in assets, and Silicon Valley Bank was just under that at about $200 billion in assets. So I wouldn't be surprised to see that come down maybe to $100 billion in assets just given the fact that these large banks clearly caused turmoil when they went down.

SEANA SMITH: Alexander, the flight of some of the deposits there from the regional. As you mentioned, some of those larger banks are attracting some of that money. Who stands to benefit from all this?

ALEXANDER YOKUM: Yeah, so I think the obvious answer, you know, is the larger banks. But I think it's clear that they don't want small banks to go down either because if you think about the financial crisis, you know, probably a lot of banks initially thought they were gaining market share, and then eventually it ended up being bad for pretty much everyone. So I think they're definitely trying to keep, you know, First Republic specifically up.

But, yeah, I mean, the larger banks, they are generally being viewed as safe right now, and deposits are generally flowing there, whereas a lot of the regional banks are seeing outflows. So I think larger banks probably is the answer.

The only thing to note, though, is that because they have benefited from this, there's a chance that they will be required to help out a little bit more in terms of paying for this. So they've made it clear that this would not be paid for by taxpayers. It'll be paid for by banking, any losses from these failures. So because they've benefited, there's a chance that they'll have to pick up a little bit more of the tab.

DAVE BRIGGS: And when it comes to First Republic, you say its actual location impacted where it is today in terms of its price. It's the faith that investors have. Why so?

ALEXANDER YOKUM: Yeah, I don't want to be too hyperbolic here, but I truly believe if they were based in a state like Alabama, they would not be struggling like they are now. So the fact that they are only 50 miles away from Silicon Valley Bank, their headquarters, and nearly half of all their deposits are in that Silicon Valley. How I think it played out is on Friday when Silicon Valley Bank clients were trying to take out their money and they couldn't, they're friends with a lot of First Republic clients, and they got really worried and started to take out their money. And I think that continued significantly on Saturday. And by the time the positive news came out about insurance-- about uninsured depositors being made whole, it was a little bit too late.

You know, I actually heard anecdotal evidence that on Monday there was long lines in front of First Republic offices in the Silicon Valley, but in other places like New York, there weren't large lines. So I really think when all your friends around you get worried, you're more likely to, you know, move your money than if potentially just one or two of your friends are getting worried.

DAVE BRIGGS: Interesting. So how much do you think this is actually emotional?

ALEXANDER YOKUM: Very emotional because-- so Silicon Valley clearly had problems, right? Their securities portfolio was very underwater. But it's-- I mean, banking is based on trust, and the second you lose trust, everybody gets out.

So like I said, I don't think First Republic would have gone down if Silicon Valley Bank didn't go down. Or I guess they haven't gone down yet, but just in terms of stock price, they've gone down significantly, and they have had deposit outflows.

But yeah, I think it's a lot of just trust based. And yeah, I think emotions play a significant part. When people get scared, they just don't want to be part of it.

SEANA SMITH: Now, Alexander, how much of the activity over the last couple of weeks has really been social-media driven? So much of the panic that we certainly did see played out on Twitter, on Instagram, and on TikTok as well.

ALEXANDER YOKUM: Yeah, so because this isn't credit based-- if it was credit based, you know, I think banks eventually would get in trouble. But because it's securities portfolio based, if deposit flows were slower, I think, you know, potentially even Silicon Valley Bank could have been OK and probably definitely Signature Bank. So yeah, I think it goes a lot quicker.

And like we were talking about like with fear about First Republic, I think people move their money, ask questions later. So I think, you know, statements can get overexaggerated on social media, and a run can happen a lot quicker. I mean, there were reports that 25% of Silicon Valley Bank's deposits were attempted to be taken out in a single day. I don't think that could occur without social media.

DAVE BRIGGS: I think it still remains at this point a Bloomberg report but that the midsized banks pleaded for FDIC insurance backstop for two years. What's the likelihood-- if, in fact, that request was made-- that it is granted?

ALEXANDER YOKUM: Yeah, it's hard to say. I mean, it's changing quickly right now. I think if another regional bank goes down, that is much more likely to go through. But, I mean, it would definitely be good for regional banks as a whole and probably, you know, stem a little bit of the bleeding. But it's a very fluid situation right now, so it's a bit tough to say.