Bank outflows make 'fintech companies more valuable' than legacy finance institutions: Dylan Ratigan

Dylan Ratigan, Host of TastyTrade's “Truth or Skepticism", joins Yahoo Finance Live to discuss banking, fintech companies versus legacy financial institutions, and bank regulation.

Video transcript

BRAD SMITH: Mixed picture for shares of regional banks as we close another tumultuous week here. PacWest trading higher today after plummeting on Thursday after the lender revealed deposits fell 9 and 1/2% in the prior week. This comes after reports that the bank is exploring a potential sale.

So let's dive into the state of the regionals with Dylan Ratigan, host of "Truth or Skepticism," on TastyTrade. Dylan, great to have you back here on the program with us. So, what we've heard is that much of the crisis or the crisis is over or behind us, but I mean, this week, the numbers tell us something different from some of the latest culprits involved in this PacWest, and then additionally you're hearing from Western Alliance over the course of this week too.

DYLAN RATIGAN: Yeah, I think the big difference though now is that everybody has taken as truth that, in the most extreme circumstance, they will be given forgiveness, to use the phrasing of your last reporter. And so there's the threat of people losing their deposits does not feel a present anymore, for instance.

In other words, the implication is that all deposits are insured, and so it's become someone else's problem, it's become a rich person's problem, stockholder, bondholder, but it's no longer an argument about deposits. And I think that is a significant shift from where we were earlier this year psychologically, which is both good for people and business, and ultimately, those banks because it reduces the pressure to remove assets.

JULIE HYMAN: I'm interested as well in sort of the flow of deposits that we have seen over the past few months. I mean, I know that's something that you're watching too. We just talked to the Robinhood CEO, for example, and it looks like that company got some money flowing into it as this was-- yeah, it's really interesting, right, this dynamic here. Where do you think-- how do you think that shakes out?

DYLAN RATIGAN: Well, I think ultimately, it makes fintech companies more valuable and legacy finance 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 changing burden, in the industry, they would call it the stickiness of the customer.

And it's easier for me to change, I don't know, which sneakers I buy that a Foot Locker from Adidas to Nike, than it is for me to change my bank account, or my mortgage, or my brokerage accounts, or these types of things. And so even in the face of neglect or bad service, the banks at the end of the day, like the cable company, how they collect their rent. And the more the fintechs, whether it's Robinhood or Tasty is another one, where I've been working for the last 10 years with Tom Sosnoff and what they've done, is a tech first move on a belief that financial customers will become less and less sticky, which is good for old and new if you have good product. But it's terrible if you're in the middle and your primary value proposition is, I have customer loyalty.

I have customer stickiness because I'm First Republic, or because I'm Silicon Valley, or because I'm the Bank of Texas, or whatever, that I do all the vineyards. Whatever 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 of this considered, is there any additional action that the government, federal government or regulators should be taking at this point in time to shore up banks?

DYLAN RATIGAN: I mean, the number one action that they need to take is they need to reattach management's decision making to the amount of risk. So a bank CEO's job is ultimately sales and risk management, and everything else that the bank does, someone else is doing. And then the-- and then the CEO theoretically works at the board on risk management.

Meaning, how much resources where we're going to risk on this type of lending? How much for these startups? How much for foreign bond markets? How much for domestic technology stocks? How much for a home mortgages? That's what the CEO's decision. That's not me, that's what the CEO's job is.

And when you see these banks fail in this way, it's always because of excess risk taking, right? Whether it's in the leverage of the lending book 10 years ago or whether it's in the idiocy of the duration structure of the bond portfolio into this rising rate structure. Either way the only way to regulate a financial institution is to create an incentive for the manager not to make dumb decisions.

And the current bank regulatory apparatus incentivizes 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 that 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 so that's why I get alarm when you hear the Federal Reserve talking about, oh, well, we don't want to adjust capital. They like leverage, everybody likes leverage. So that was the central banker said, I want-- why are you going to mess with the leverage for the big banks? But that's where bank regulation lives.

JULIE HYMAN: Yeah, well, even when they do regulate and incentivize away from risk, they find new ways to take risks, as you well know.

DYLAN RATIGAN: Which is why the partners, Julie, was the best model going back, not to go old timey, 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 so 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'm like, yeah, give Julie all the money she wants.

JULIE HYMAN: Sure, why not?

DYLAN RATIGAN: I'll take the fee. Anyway that's a philosophical discussion.

JULIE HYMAN: It is a longer one to be had another time. Dylan Ratigan great to catch up with you. Talk to you soon.