U.S. banking outlook: Regulatory crackdown is 'inevitable'

American Banker Washington Bureau Chief John Heltman and eToro Global Markets Strategist Ben Laidler joined Yahoo Finance Live to discuss the outlook for the U.S. banking system.

'I think there's gonna be a regulatory crackdown. I think that's absolutely inevitable,' said Laidler.

While Heltman stated that 'this is a problem that regulators are going to have to grapple with sooner or later.'

Full video transcript:

John Heltman (00:00:05) - The banks that have reported so far, JP Morgan, Wells Fargo, did better than expected, but these are some of the bigger banks. The place to watch is the mid-size regionals, the PNCs, the M&Ts. PNC's numbers came in last week and they were, you know, decent. Although their warning of concerns about tighter net interest margins with cost of funds really going up and cost of long-dated loans staying the same. So that's something to watch, especially for smaller and mid-size banks.

You saw the last month $300 billion in deposits left banks and something like $240 billion went into money market funds. And that's for the simple reason that they make more money in a money market fund than in a bank, although they don't have the security of deposit insurance that you have with a bank. So this is a problem that regulators are going to have to grapple with sooner or later, to figure out how to even the playing field between money market funds and banks and bank deposits, to figure out how to stem that tide. But it's not, I don't predict it being a giant rush, but it's gonna be a slow drip over time and a slow drip that is going to impact, especially, as I said, the smaller and medium-sized banks.

Ben Laidler (00:01:16) - Financial conditions are tightening. I think the banks are gonna be doing the Fed's work for it. We're not saying there's a banking crisis, but, you know, we have lived through a scare. And I think that means a couple of things. I think deposits are leaving the system. They're being attracted into money market funds by the 5% rates that are on offer versus the sub 1% you get at your bank. That predates SVB and the recent banking scare. So I think that's gonna continue and you've absolutely seen that even with the results from the big banks.

Secondly, I think there's gonna be a regulatory crackdown. I think that's absolutely inevitable. And I think thirdly, the smaller banks have seen, you know, the worst of this sort of deposit outflows are gonna see the worst of this regulatory crackdown. But I think regardless everybody is gonna be lending less going forward than they might otherwise have done. And lending standards already tightening. So again, I think this is just, you know, we've already got the lagged effect of 5% interest rates, and now on top of that, we've got banks which are gonna be lending less, and that that combination is gonna slow the economy in slow earnings, which we really haven't seen yet.

Watch American Banker Washington Bureau Chief John Heltman's full interview here.

See eToro Global Markets Strategist Ben Laidler entire appearance here.

Video transcript

JOHN HELTMAN: The banks that have reported so far-- JP Morgan, Wells Fargo-- did better than expected. But these are some of the bigger banks. The place to watch is the mid-sized regionals, the PNCs, the M&Ts. PNC's numbers came in last week. And they were decent. Although, they're warning of concerns about tighter net interest margins with cost of funds really going up and cost of long-dated loans staying the same. So that's something to watch, especially for smaller and mid-sized banks.

You saw was it last month $300 billion in deposits left banks and something like $240 billion went into money market funds. And that's for the simple reason that they make more money in a money market fund than in a bank, although they don't have the security of deposit insurance that you have with a bank.

So this is a problem that regulators are going to have to grapple with sooner or later to figure out how to even the playing field between money market funds and bank deposits to figure out how to stem that tide. But it's not-- I don't predict it being a giant rush. But it's going to be a slow drip over time, and a slow drip that is going to impact, especially as I said, the smaller and medium-sized banks.

BEN LAIDLER: Financial conditions are tightening. I think the banks are going to be doing the Fed's work for it. We're not saying there's a banking crisis. But we have lived through a scare. And I think that means a couple of things. I think deposits are leaving the system. They're being attracted into money market funds by the 5% rates that are on offer versus the sub-1% you get at your bank. That predates SVB and the recent banking scare. So I think that's going to continue. And you've absolutely seen that even with the results from the big banks.

Secondly, I think there's going to be a regulatory crackdown. I think that's absolutely inevitable. And I think, thirdly, the smaller banks have seen the worst of this, the deposit outflows. They're going to see the worst of this regulatory crackdown. But I think, regardless, everybody is going to be lending less going forward than they might otherwise have done. And lending standards are already tightening. So, again, I think this is just-- we've already got the lagged effect, the 5% interest rates. And now on top of that, we've got banks which are going to be lending less. And I think that combination is going to slow the economy and slow earnings, which we really haven't seen yet.