CFRA Research Director of Equity Research Ken Leon and Odeon Capital Group Financial Strategist Dick Bove join Yahoo Finance Live to discuss what to expect after the acquisition of First Republic by JPMorgan.

Video Transcript

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- JPMorgan taking over troubled First Republic Bank. The failure of the regional lender is the second largest in US history. What it means for JPMorgan-- also, what it means for the broader banking sector. For that, we want to bring in Ken Leon, CFRA Director of Equity Research, and Dick Bove, Odeon Capital Group Financial Strategist. It's great to see you both. Ken, let me first start with you-- whether or not this is a good deal for JPMorgan. What do you think?

KEN LEON: This is a good deal. It's a clean deal for JPMorgan. Unlike 2008, where the large banks were part of the problem, they certainly waited until this bank had to be put to FDIC. And there's loss-share agreement, so there's not going to be much risk to clawbacks in the future. They do add deposits and also a pretty good wealth management business.

So incrementally, in the scheme of things for JPMorgan on deposits, it's less than 4%. But they incrementally add some assets and do a good thing to show the country that we don't have systemic risk here. But I think, for Dick, with his stellar banking career covering regional banks, that's questionable on what will be the new business model, where deposits are a little bit more sensitive and not long-duration and how you match up assets and liabilities for a lot of the smaller banks. It's going to be a real challenge, looking ahead-- not only now but over the next three to five years.

- Well, Dick, I'd love for you to weigh in there, just in terms of how you think this potentially reshapes or, really, influences the future, here, of banking.

DICK BOVE: Well, I think Ken is right. It's going to have a major impact on the future of banking. I think that this-- I do believe there's systemic risk there. I think that this is a replay of the situation in the mid 1980s, when the Resolution Trust Corporation was set up and all the-- 100-- I'm sorry, about 1,000 S&Ls went bankrupt.

Basically, what the regional banks are facing is rising costs for their deposits, as a result of the interest rate increases, and, as a result of those same interest rate increases, declining value of their assets. So you reach a junction point where, at some point, you're, now, looking at your deposit cost exceeding the yield that you're getting from your assets, and you've got a problem.

And I think the JPMorgan acquisition exacerbated that situation because, while everybody's running around saying that the bank deposits in the United States are guaranteed-- whether it's the president, the secretary of the treasury, or other individuals-- the fact of the matter is that people who lend money to banks are not protected. The people who have preferred stock holdings in banks are not protected.

And JP Morgan underlined that very clearly today, that they were not going to cover either of those entities, which means that bank-- regional bank ratings are likely to fall. Their access to the capital markets are likely to be contracted. And as a result of that, as Ken clearly said-- three years of difficulty in this area, I think, is a modest assumption.

- Dick, are there risks of more failures? This is the fourth regional lender-- fourth lender, here, to collapse this year. Could more be on the brink?

DICK BOVE: Oh, I think there's absolute certainty of it. Just think about the fact that-- people made a huge amount of money here, right? In other words, those people who have driven SVB out of business, who benefited from the signature failure, who benefited from the First Republic slow die-- they make a lot of money. And they're, now, looking around to find another target, another bank which is in a position where they're going to go under.

And what they're looking for is-- does the bank have a large portfolio of fixed-rate mortgages? Does the bank have a huge amount of commercial real estate? Does the bank have a huge gap between its real, if you will, values and its published values?

In other words, when you pick up the bank statement and you see it's got xyz in assets and abc in equity, do they really have it? Or are they-- do they have a number that they're publishing, which fails to recognize marking to market? So they'll be out there. They're prowling. The antelopes are being prowled by the lions here, and the lions are going to find other ones to attack and bring down. So yes, there will be more bank failures.

- Ken, when it comes to what's happening with the larger banks, with this acquisition from JPMorgan-- obviously, the largest US Bank here, by assets, is getting even bigger. We know that there's been some criticism from certain sides of the aisle-- Senator Warren in a tweet today saying that, the failure of First Republic Bank shows how deregulation has made the too big to fail problem even worse. What's your response to that? Because the flip side of it would be that people should be thankful that these banks are too big to fail and they're able to come to a rescue at a time like this.

KEN LEON: It's a wasted conversation. And quite honestly, Dick's points are well taken on where there can be risk for the regional banks, smaller banks. They're going to have more capital liquidity risk. But I would note it's going to come from other parts of the financial system, where we have the next big issue.

It could be the shadow banks. It could be those who are lending aggressively into consumer. And credit risks-- should we have some form of recession in the second half of this year-- will begin to pop up. But there's no distressed industry out there yet. I cover office real estate, and that is basically something that will take months to years-- it's not going to be a blow-up and you can refinance or change the loans. But it is an issue.

So overall, again, I think the Fed and other regulators are buttoning up the banking system, and they missed this, big time. They need more staffing, not just bringing their C team to cover banks with over $100 billion of assets. And when we look ahead, it's going to be the shadow banks and other areas that I think is going to be part of the news.

- Dick, what do you think is the one takeaway that we could really have, just in terms of Jamie Dimon's-- not only influence but the fact that he has come to the rescue a number of times within the banking sector, not only today in what's transpired over the last several weeks but, a number of times, particularly with Bear Stearns, 15 years ago-- the biggest lessons that we can learn. What do you think that is?

DICK BOVE: Well, there's an understanding, within the industry, that the FDIC doesn't have any money. In other words, the FDIC has less than $100 billion, by my estimate, at the current time, to cover $10 trillion in insured deposits, and they're arguing, if you're the President of the United States, $20 trillion in total deposits-- and they can't do it. They can't do it. They don't have the money.

The Federal Reserve is sitting with a real net-worth deficit of $1 trillion. The Federal Reserve lost $15 billion in the fourth quarter of last year. They can't do it either. So who is going to do it? Who is going to protect the other banks in the country? got the fact of the matter is that it's going to be the huge, monolithic banks that we now have. And of course, JPMorgan Chase is the best of the breed.

By the way, I think you ought to pick up on Ken's thought. I mean, the shadow banking system is going to be disastrous in the next few quarters, if, in fact, we basically have a recession, and maybe even if we don't have a recession because there are no insured deposits in the shadow banking system, and people are not going to start running in and lending money to these commercial Lenders in an environment like we have right now.

- OK, something, of course, that could potentially have big implications. Dick Bove, Ken Leon, great to have you both on together. Thanks so much.