Wedbush Securities Managing Director David Chiaverini joins Yahoo Finance Live to discuss First Republic Bank’s failure, what it means for the banking industry at large, credit quality, the Fed, and the outlook for depositors.
Video Transcript
BRAD SMITH: David, great to have you here with us once again. First, you know, as we think about what this implies for confidence in the banking sector, does the confidence improve after this to the general public, businesses that are dealing with banks, depositors that have also, in one way or another, had to think across, all right, where are they depositing? Where is their money sitting right now? Is the confidence amid this banking crisis, is that more secure or less so after a deal like this?
DAVID CHIAVERINI: Yeah, I think that the resolution of First Republic should be helpful because this was sort of the last of the big banks that was teetering. So I would think that with this behind the industry, it should lead to additional kind of confidence that everything is-- kind of the acute stress in the system is behind us, at least in the here and now.
Now, there are headwinds facing the banking industry as we look out over the next 12 to 18 months, but at least in the very near term, I'm not expecting any additional bank failures. There are a couple, you know, smaller banks that have some issues in terms of their fair-value accounting. But in terms of bigger banks where, you know, the media has really latched onto-- and these smaller banks just aren't getting the same level of attention, which means we probably won't see bank runs on those smaller banks. But when you have a big bank like First Republic that is teetering and a lot of people know the name First Republic, it makes us susceptible to a potential bank run, and that's what we saw in the first quarter in the aftermath of SVB and Signature Bank going down.
DIANE KING HALL: David, Diane here. Got to ask you, could or should the federal government have done more to shore up the regional banking sector?
DAVID CHIAVERINI: I think they did exactly what they needed to do, and the stresses on First Republic were just insurmountable even with the unprecedented liquidity because remember, they put in place-- the Federal Reserve put in place the Bank Term Funding Program right after SVB went down, and that enabled banks to pledge their securities at par value even though they were actually worth, you know, much less than the par value. So from a regulator standpoint, they did what they could to stabilize the system, and unfortunately it wasn't enough for First Republic.
BRAD SMITH: Is this it? Is the banking crisis over?
DAVID CHIAVERINI: I think the acute banking crisis is over from an interest-rate-risk perspective because of that Bank Term Funding Program. That stress on securities portfolios is what kind of ignited the downfall of SVB and Signature Bank and now First Republic. That BTFP program should enable the stability to be in place.
But as we look out, what I was alluding to with the 12- to 18-month outlook, you know, the Fed is out there with quantitative tightening. They're raising interest rates. They're looking to slow down the economy. Unemployment may increase, and that could make returning funds or repaying loans that much more difficult. So credit quality could begin to weaken, particularly within commercial real estate and the office market, and that could be the next shoe to drop with the banking system. But I'm not expecting that to really come to fruition until 12 to 18 months from now. So from an acute standpoint, I think it's behind us.
DIANE KING HALL: So from an acute standpoint, you're seeing the issues in the regional banking sector behind us, but talk to me about the deal landscape. Obviously this wasn't a deal. I mean, this was a receivership, then JPM buying the majority of the assets. So what are you expecting to see with regard to consolidation in the banking sector? Are you expecting to see more, the bigger banks gobbling up the regional banks, or is there a place for-- do the regional banks continue to have their place in the business system?
DAVID CHIAVERINI: I do expect some additional consolidation, and we've seen consolidation occurring over the past several decades, and I think that an event like this could accelerate it. Now, right now the bid-ask spread between buyer expectations and seller expectations is pretty wide, so I would think that any deals that occur very well may be in a somewhat distressed scenario as this credit-quality issue, you know, moves forward. But I do expect additional consolidation to occur.
BRAD SMITH: And so with what's taken place across the banking sector to this point, it was a question in the previous Fed meeting of whether or not that would actually-- that would change any type of policy pathway that they had set forth on. So now in the next FOMC meeting that is set to commence, how does this change at least the discussion that they've been having?
DAVID CHIAVERINI: I think that they've been steadfast in their approach of trying to bring down inflation to that 2% target, and they've communicated that they are nearing the end of their rate-hiking cycle. So we're expecting another 25-basis-point rate hike. There could be one more after that. But all signs are kind of pointing to them pausing after the next one to two rate hikes, and the futures market is actually looking towards potentially seeing rate cuts either at the late part of this year or early 2024. So I think that they're not going to kind of waver from the path that they've been on despite First Republic going to JPMorgan this morning.
DIANE KING HALL: All right, well, from First Republic to the Fed, our thanks to David Chiaverini of Wedbush Securities, managing director equity research. Thanks so much.
