Odeon Capital Group Financial Strategist Dick Bove sits down with Yahoo Finance Live to talk about the banking system's outlook after First Republic Bank received a rescue deposit from other banks and the potential for further banking regulations.

Video Transcript

SEANA SMITH: We want to get back to our top story. 11 banks depositing $30 billion in First Republic Bank. It is the latest effort to contain the fallout from the collapse of Silicon Valley Bank, and also Signature Bank, over this past week. Bank of America, Citi, JP Morgan, Wells Fargo, all depositing $5 billion each. Let's talk about this with Dick Bove. He's Odeon Capital Group's financial strategist. Dick, it's great to speak with you here. So the significance of this move, what does this signal? Is the banking crisis over?

DICK BOVE: Well, I think that the near-term banking crisis is definitely over. I think that if you go back in history, you know that before the Federal Reserve was formed, that's what was done to preserve stability in the banking industry. The banks would come together and basically share funds and bail out the problem company. The big event in 1907, which ultimately gave rise to the Federal Reserve is when JP Morgan supposedly got all the bankers in his house, locked the doors, said, you can't leave until you solve this banking crisis. And they solved it.

And then in more recent time, that the mutual fund that went down, the same thing happened. Everybody got together, put money in, except for Bear Stearns, which refused to do so. And so we're seeing it happen again. And it works. It's exactly the right thing to do. The federal government should not have to bail out the banking industry. The banks should have to bail out the banking industry. And that's what they're doing. And in my humble estimation, the Federal Reserve didn't have the money to bail out the banking industry should things continue to go awry.

Because I think that if you take a close look at the balance sheet of the Federal Reserve, you'll see it has negative equity of $1.1 trillion. They can't break the banks, however. If you have the biggest banks in the United States coming together, putting their money in. And basically what you're going to wind up with is enough money there that no one is going to raise the issue that the banks can't pay back their deposits. So I think it was the right move. I think the crisis for the moment is gone.

I think what you'll see in the future is Michael Barr at the Federal Reserve who's the head of banking supervision. He'll be throwing out so many more banking regulations that it's going to have a big impact on money costs and on the functioning of the industry. But the industry is sound. And it's not going to collapse.

- Dick, these deposits have to stay at First Republic for 120 days and earn interest at the same rate of current depositors. I guess the question is for First Republic receiving this help from these other banks. At what cost? I mean, we're looking at the stock that is down now 13% in after hours.

DICK BOVE: Well, I think that First Republic was going to have a rough year in 2023. And I'm sure it's going to have a rough year even more so now because these banks are not giving them the money for nothing. But the fact is, and First Republic's problem is a very simple one. And that is that its portfolio is composed primarily of mortgages to very high income, high wealth individuals. And those mortgages pretty much cannot raise their rates dramatically as interest rates go up where the cost of the money that First Republic has does go up in cost.

So you get a squeeze on the margins of the institution. And that's going to cause the institution's earnings to go down in 2023. However, first Republic is a good bank. It's a well-run bank. It has a very-- it has a top management team. The customers of this bank really like the bank despite what they did to the deposits here. And the employees at this bank have been there for decades. And they like working there.

So we're not talking about a flaky institution. We're talking about a sound bank in the United States that is running into the typical SNL problem of basically funding long-term loans with short-term money. And that means that the bank is not going to have a very robust earnings outlook in 2023, and maybe not even in 2024. But it's not going to go under number one. Number two, all of the debt in that bank is likely to be paid on a ratably at the right time.

The preferred stock are going to pay their dividends at the right time. So for the people who are invested in this company in those two fashions, in my view, they're going to get their money back in terms of dividends and interest payments. And I think that's what they really care about. The common stock is going to fluctuate. I think there's no question about that.

SEANA SMITH: Dick, you mentioned more regulations on the way. What does that look like? What the impact to the banks?

DICK BOVE: Well, I think the first thing that-- well, let's go back a little bit. Why did this crisis occur? A crisis occurred because the banking industry in the United States has lost the faith of the American public. The depositors in banks never got to participate in the windfall gain that the banks got when interest rates went up.

In other words, when interest rates went up, the banks raised their rates immediately on their loans. But they didn't touch very much their rates on deposits. The depositors saw about a 25% increase in the returns that they got. And the banks got the other 75% to 80%. Now again, and I'm going to say in ancient times, there was a guy named Henry Gonzalez who was the Congressman that was the head of the banking committee in the House of Representatives.

And whenever the banks would do that, he would have an umbrage. He would have congressional hearings. And Wilbur Mills would do the same thing. And Rand Paul would do the same thing. I guess they're all Texans. But the point is the banks didn't do it this time. Then the second group that the banks lost faith with was the investors.

The banks started playing accounting games. They started moving assets around to places where they didn't have to mark them to market. And all of a sudden, the banks are now reporting equity that they don't have. And they didn't do anything illegally. They were following the accounting rules.

But they're reporting equity that they don't have as part of their financial statements. So then they're playing around with things like tangible common equity, which is a joke number. They're buying back stock, which is increasing their EPS at the cost of net income. So the net effect is investors said, I've had it with this. Bank stocks are selling at prices today below, in many cases, in most cases, where they were five years ago.

So all of this financial engineering, and playing games with the numbers, didn't work. And now you had set the industry up for a crisis to occur. This guy in California gets all upset because he loses money in Silvergate, and he starts throwing around comments about SIVB not being able to meet its obligations. And bango, you have your mini crisis, which I believe has been resolved.

SEANA SMITH: Well, Dick Bove, always great to get your thoughts. Thanks so much for hopping on here with us. We look forward to speaking with you again. Have a good night.