Bank payouts make ‘fintech companies more valuable’ than legacy financial institutions: Dylan Ratigan
Dylan Ratigan, host of TastyTrade’s “Truth or Skepticism,” joins Yahoo Finance Live to discuss banking, fintech companies vs. legacy financial institutions, and banking regulation.
Video transcription
BRAD SMITH: Mixed picture for shares in regional banks as we end another turbulent week here. PacWest traded higher today after Thursday’s plunge after the lender revealed that deposits fell 9 1/2% last week. This comes after reports that the bank is exploring a potential sale.
So let’s dive into the state’s regions with Dylan Ratigan, host of “Truth or Skepticism” on TastyTrade. Dylan, great to have you back here on the show with us. So what we’ve heard is that a lot of the crisis or the crisis is over or behind us, but I mean, this week the numbers are telling us something other than some of the latest backers involved in this PacWest and in addition I’m hearing from the Western Alliance during this week as well.
DYLAN RATIGAN: Yes, however, I think the big difference now is that everyone has taken it for granted that in the most extreme circumstances they will be pardoned, to use the phrasing of your last reporter. And then there is the threat of people losing their deposits not feeling a gift anymore, for example.
In other words, the implication is that all deposits are insured, and so it has become someone else’s problem, it has become a rich person’s problem, shareholder, bondholder, but it is no longer an argument about deposits. And I think that’s a significant shift from where we were earlier this year psychologically, which is both good for people and businesses, and ultimately these banks because it reduces the pressure to remove assets.
JULIE HYMAN: I am also interested in the flow of deposits that we have seen in recent months. I mean, I know it’s something you look at too. We just talked to the Robinhood CEO, for example, and it seems like the company has had money flowing into it as this was — yeah, it’s very interesting, isn’t it, this dynamic here. Where do you think– how do you think it shakes out?
DYLAN RATIGAN: Well, I think ultimately, it makes fintech companies more valuable and legacy financial institutions less valuable, as a multiple and as an institution because banking as a general category, as you well know, Julie, makes a lot of its money based on the friction. or the shifting burden, in the industry, they would call it the customer’s stickiness.
And it’s easier for me to switch, I don’t know, what sneakers I buy like a Foot Locker from Adidas to Nike, than it is for me to switch bank accounts, or mortgages, or brokerage accounts, or those types of things. And so even in the face of neglect or poor service, at the end of the day, like the cable company, the banks want to know how to collect the rent. And the more the fintechs, whether it’s Robinhood or Tasty is another one, where I’ve worked for the last 10 years with Tom Sosnoff and what they’ve done is a technical first move on a belief that financial customers will become fewer and less sticky, something that is good for old and new if you have a good product. But it’s terrible if you’re in the middle and your primary value proposition is I have customer loyalty.
I’m sticky to the customers because I’m First Republic, or because I’m Silicon Valley, or because I’m Bank of Texas, or whatever, that I do all the wineries. Regardless, the bank’s narrative becomes much less valuable. And I think that’s part of why you’re seeing all these stocks compress, even after there’s implicit, if not explicit, deposit insurance.
BRAD SMITH: So with all that in mind, are there any additional measures that the government, federal authorities or regulators should be taking at this time to support banks?
DYLAN RATIGAN: I mean, the most important action they need to take is that they need to link management decision-making to the amount of risk. So a bank manager’s job is ultimately sales and risk management, and everything else that the bank does, someone else does. And then – and then the CEO theoretically works on the board with risk management.
Meaning, how much resources should we risk on this type of lending? How much for these startups? How much for foreign bond markets? How much for domestic tech stocks? How much for a mortgage? That is the CEO’s decision. It’s not me, it’s the CEO’s job.
And when you see these banks fail like this, it’s always because of excessive risk-taking, right? Whether it is in the influence of the loan book 10 years ago or whether it is idiocy with the duration structure of the bond portfolio into this rising interest rate structure. In any case, the only way to regulate a financial institution is to create an incentive for the manager not to make stupid decisions.
And today’s banking regulatory apparatus motivates the opposite. It says, take– the dumber the risk, the better, because you can collect short-term income in your bonus while you’re in the middle of the risk taking architecture. And at the end, if it blows up, someone else is holding the bag, whether it’s a shareholder, the bondholder or the taxpayer.
And that’s why I get alarmed when you hear the Federal Reserve talking about not wanting to adjust capital. They like influence, everyone likes influence. So it was the central banker who said, I want– why are you messing with leverage for the big banks? But this is where banking regulation lives.
JULIE HYMAN: Yes, well, even as they regulate and incentivize away from risk, they find new ways to take risks, as you well know.
DYLAN RATIGAN: That’s why the partners, Julie, was the best model back, not to be old fashioned, but you go back to 1975. And if you were going to take the risk, it was a Salomon Brothers risk or it was a Smith Barney . And then you go home at night, you’re like, I don’t know if I want to give Julie this crazy loan. But if it’s not, if it’s someone else’s money, I’ll give Julie all the money she wants.
JULIE HYMAN: Sure, why not?
DYLAN RATIGAN: I’ll take the fee. It is a philosophical discussion anyway.
JULIE HYMAN: It’s a longer one to get another time. Dylan Ratigan great to catch up with you. Talk to you soon.
