The banking sector is still filling in the cracks left by the collapse of Silicon Valley Bank and other regional banks. Western Alliance CFO Dale Gibbons joins Yahoo Finance Live to discuss the recovery from this year's banking crisis, the outlook on Fed rate hikes, and the need for tighter financial regulations on banks.
Video Transcript
- US small and mid-sized banks across the country faced a crisis in March that sent investors reeling. Up until now, the sector has settled with the majority of regional lenders seeing a rally in recent weeks. But where do we go from here? Dale Gibbons, CFO of Western Alliance, joins us now, along with Yahoo Finance reporter, David Hollerith. Dale, it's great to see you. So certainly, we have seen some stabilization within your sector. Western Alliance shares are well off. They rallied well off the lows, still though off about 40% since it started the year. Just first, give us a sense of the shape that your bank is in today.
DALE GIBBONS: We're very strong. I think it was a little unusual that we got kind of pulled into this to begin with. It was really our relationship with relative to Silicon Valley Bank and that we have a company called Bridge Bank, one of our subsidiaries. And it's a direct competitor to SVB. And I think that's what kind of pulled us in initially, even though our we don't have many similarities to SVB beyond that. And as a result, I think we've educated our depositors in the street to some degree about that, and that's the reason why our stock has recovered significantly but still below where it certainly was at the beginning of this year.
DAVID HOLLERITH: Hey, Dale. David Hollerith. Thanks for coming on. I think to your point, the point you're making, for regional bank stocks, investors have sort of had kind of a crazy go at it during that period. Obviously, short sellers did go big into the market. But we're curious to understand more about what was going on inside the bank during those early days. Obviously, it must have been a difficult time. And I'm really curious about what you had to do in your job.
DALE GIBBONS: Well, I appreciate that. It was a bit frenetic initially. March 10th is when SVB was taken over. Our stock was about $50, getting to your comment in terms of short sellers. And so unusual activity I would say. We opened out $12 on that Monday the 12th and the 13th. And as a result of that, that really was picked up by the media. And that really kind of spun up a situation.
And depositors would look at the stock price and then say, gosh, the equity markets are telling me something I don't know. I need to be able to respond to that. And I think that's really what precipitated some of the withdrawals we had. And it really was almost only that first day, that March 13.
So we quickly put out an 8K and a press release describing how different we were from SVB. Our insured deposit levels are more than 10 times what theirs were back then. And as we did that, I think it calmed things down that our stock more than doubled going into the close on that Monday.
So in that sense, we've undertaken really a method to inform our depositors of what goes on in terms of some of the shenanigans with short selling. And also had them sign nondisclosure agreements if they were interested. And we tell them exactly we're on deposits and where we were on rating agencies and things like this. And I think that's really strengthened those relationships that we've had. And it's given us a profile now where we're growing deposits again, and we're up quarter to date, and we expect to be up quarter to date by the end of this month.
- So Dale, as you look forward, it doesn't sound like you guys had any sense that something like this was coming, that something like this would be such a large threat here to Western Alliance. When you talk about some of those lessons, and you've had two months now to reflect on what has happened, how was that shaped, or how are you reshaping Western alliance here going forward?
DALE GIBBONS: Yeah. Well, we did see that SVB in particular had a very large debit. It's a little bit hidden because it's not on the front of their balance sheet but in their health and maturity securities. In their footnotes, you can see they had a $15 million loss that was unrecognized, and that was greater than their capital. And so that should have been highlighted more. We're highlighting that today. We're highlighting where we stand in terms of our capital levels, including any embedded losses which for us are really nominal in the health maturity portfolio.
We've also learned in terms of behavior of depositors. So in terms of the tech space, I think people were a little surprised not only how quickly the deposits move but how much of an effect they went in unison. And so we have maybe a little different assumption set in terms of how stable those deposits might be going forward.
But one of the things that I don't think has really been noticed enough is each of these banks that failed, all of them were essentially monoline institutions. So SVB was a tech bank. Signature Bank in New York was largely the crypto bank. And First Republic was the private bank. We pride ourselves on diversification. We're really doubling down on that today.
And one of the reasons why this only had a limited impact on us was because the tech space that was the parallel part that we had with SVB was only 13% of ours versus almost all of theirs. And so that really kind of helped ringfence kind of the risk that we have now gone past.
DAVID HOLLERITH: Yeah. And Dale, just sort of us getting a broader look at the economy from the perspective of banks. It's been talked about a lot in recent weeks about how important regional banks are to the US economy. And there's something like 4,700 different banks in the country. And I was kind of curious if you could go more into that just as someone who is running the financials of a bank. Like what exactly is it about regional banks that is so important to the economy?
Well, I really appreciate this question, David. I mean, regional banks for the most part have been growing at a faster rate than the large banks. And so just why is that? They must be doing something that the public appreciates. And what I would say that it is we're typically faster to market. We're faster to decision making. We don't have the bureaucracy. Bureaucracy tends to grow exponentially as you get larger. And that just slows everything down.
The other thing as well is I think most people are aware that posted rates at the large banks are very nominal. You would not know that interest rates are up 500 basis points, 5% in the past year, if you bank there. But meanwhile, the regional banks and a lot of the smaller ones as well have been much more responsive to the kind of change in rates. And so I think it's all about our ability to really hone in on what the client needs. The larger something gets, the more cookie cutter processes tend to be. And that really doesn't work for so many businesses.
DAVID HOLLERITH: Yeah. And I mean, I think to sort of follow on that too, I mean, the rule now that is sort of well known to the market is that banks will continue to have their profit squeezed given that we're in a higher interest rate environment, and interest rates do not appear to be lowering any time soon. I'm curious, how much does this change the business model for regional banks from your perspective?
DALE GIBBONS: Well, I think it's I think there is an important element here in terms of how a regional banks are going to continue to be able to grow. I think you do need more clarity, and I think the revisions in terms of some of the deposit insurance mechanisms would be helpful in that regard.
As a result of what's taken place, typically how you get a large bank is it's a small bank, and maybe it acquires some banks, and it grows organically and becomes large over time. Well, as part of that becoming large, you're going to be working with larger companies. You're going to be making larger loans. And so when your loans get into the hundreds of millions of dollars each but you only have deposit insurance at $250,000.
Meanwhile, the large banks are presumptively too big to fail, i.e. all those deposits are safe. It slows down your ability to provide funding to be able to make those larger loans. And without some mechanism to do that, I think you're going to end up with more of a barbell in terms of banking the banking industry. You're going to have very large institutions that all again have the assumption that they won't be closed down. And then the very small ones, the community banks, but they can't really service larger commercial clients.
So what do you do in the middle? That's where the regional banks are. And I think it does make it more challenged in terms of being able to push funding higher without some mechanism to be able to provide more confidence to the depositors in terms of those funds that are residing at those institutions.
- And Dale, going off that I guess, would you welcome more regulation? And to that degree, what do you think or is there anything that needs to be done in order to put a bank like yours, but the regional banking sector at large, on firmer footing?
DALE GIBBONS: We welcome more regulation. I look at what happened to SVB, I mean, with their large debit and their securities book. That is something that should have never been allowed, was a management failure. I think it should have been pounded on by the regulators that really didn't happen either until it was too late.
To me, that's a better solution than just throwing capital. I mean, capital is really important. I mean, that is a fundamental element of confidence that the public can have. But the capital, it doesn't replace incompetence. And so you really need both to be able to do that. Capital levels in the US are higher than almost anywhere else in the world. I think it is a strongly capitalized industry. But again, there were certainly some management failures, and regulatory oversight could have been more robust.
DAVID HOLLERITH: Yeah. And just to get into that a little bit more we heard from the Justice Department earlier this week who had their antitrust division had sort of come out as saying they wanted to update guidelines for bank mergers. And obviously, there are these capital requirements that also appear to be coming as proposal soon. And I'm just curious. What is the conversation been like with banking regulators for Western Alliance?
DALE GIBBONS: Well, we all have shared the same goal. We all want a strong industry. We want to high confidence from the public in these institutions. We think that contributes to not only the success of Western Alliance but the industry at large and really moves the economy along. I mean, banks are the primary provider of credit. That really is the engine for the economy. And so pushing that forward, we all share that same goal.
- All right. Dale Gibbons, CFO of Western Alliance. We really appreciate you taking the time. We hope to have you back again soon here at Yahoo Finance.
DALE GIBBONS: Thank you for your time.
- And of course, thanks to David Hollerith as well.
