Regional bank crisis: 'We welcome more regulation', says Western Alliance CFO

We're very strong. I think it was a little unusual that we got kind of pulled into this to begin with. It was really our relationship with Silicon Valley Bank, and that we have a company called Bridge Bank, one of our subsidiaries, and it's a direct competitor to SVB. I think that's what kind of pulled us in initially, even though we don't have many similarities to SVB beyond that. As a result, I think we've educated our depositors and the street to some degree about that, and that's the reason why our stock has recovered significantly, but still below where it was at the beginning of this year.

Well, I appreciate that, David. It was a bit frenetic initially. On March 10th, when SVB was taken over, our stock was about 50. Getting to your comment in terms of short sellers and some unusual put activity, I would say we opened out at 12 on that Monday, the 12th or the 13th. As a result of that, that really was picked up by the media and that really kind of spun up a situation. Depositors would look at the stock price and say, 'Gosh, the equity markets are telling me something I don't know, I need to be able to respond to that.' I think that's really what precipitated some of the withdrawals we had. It really was almost only that first day, March 13th. So we quickly put out an 8K and a press release describing how different we were from SVB. Our insured deposit levels are more than 10 times what theirs were back then. As we did that, I think it calmed things down. Our stock more than doubled going into the close on that Monday. Since then, we've really undertaken a method to inform our depositors of what goes on in terms of some of the shenanigans from short selling, and also had them sign non-disclosure agreements if they were interested. We tell them exactly where we were on deposits and rating agencies and things like this. I think that's really strengthened those relationships, and it's given us a profile now where we're growing deposits again. We're at quarter-to-date and we expect to be a quarter day by the end of this month.

Yeah, well, we did see that SVB in particular had a very large deficit. It's a little bit hidden because it's not on the front of their balance sheet, but in their held-to-maturity securities in their footnotes, you can see they had a $15 billion loss that was unrecognized, and that was greater than their capital. So that should have been highlighted more. We're highlighting that today. We're highlighting where we stand in terms of our capital levels, including any embedded losses, which for us are really nominal in the held-to-maturity portfolio. We've also learned in terms of the behavior of depositors. In terms of the tax base, I think people were a little surprised not only how quickly the deposits moved, but how much of an effect they went in unison. So we have maybe a different assumption set in terms of how stable those deposits might be going forward. But one of the things that I don't think has really been noticed enough is each of these banks that failed, all of them were essentially monoline institutions. SVB was the tech bank, Signature Bank New York was largely the crypto bank, and First Republic was the private bank. We pride ourselves on diversification. We're really doubling down on that today. One of the reasons why this only had a limited impact on us was because the tech space, the parallel part that we had with SVB, was only 13% of ours versus almost all of theirs. So that really helped ring-fence the risk that we had, which we have now gone past.

Well, I really appreciate this question, David. Regional banks, for the most part, have been growing at a faster rate than the large banks. Why is that? They must be doing something that the public appreciates. What I would say is we're typically faster to market, faster to decision making. We don't have the bureaucracy that tends to grow exponentially as you get larger, and that just slows everything down. The other thing is I think most people are aware that posted rates at the large banks are very nominal. You would not know that interest rates are 500 basis points, 5% in the past year, if you banked there. Meanwhile, the regional banks, and a lot of the smaller ones as well, have been much more responsive to the change in rates. So I think it's all about our ability to really hone in on what the client needs. The larger something gets, the more cookie-cutter processes tend to be, and that really doesn't work for so many businesses.

Well, I think there is an important element here in terms of how regional banks are going to continue to be able to grow. I think you do need more clarity and revisions in terms of some of the deposit insurance mechanisms would be helpful in that regard as a result of what's taken place. Typically, how you get a large bank is it's a small bank, maybe it acquires some banks, grows organically, and becomes large over time. If part of that becoming large, you're going to be working with larger companies, making larger loans. When your loans get into the hundreds of millions of dollars each, but you only have deposit insurance at $250,000, meanwhile the large banks are presumptively too big to fail, i.e., all those deposits are safe. It slows down your ability to provide funding to make those larger loans. Without some mechanism to do that, I think you're going to end up with more of a barbell in the banking industry. You'll have very large institutions that have the assumption that they won't be closed down, and then the very small ones, community banks, but they can't really service larger commercial clients. So what do you do in the middle? That's where the regional banks are, and I think it makes it more challenging to push funding higher without some mechanism to provide more confidence to the depositors in terms of those funds residing at those institutions.

We welcome more regulation. I think that, yeah, I looked at what happened to SVB. I mean, with their large deficit in their securities book, that is something that should have never been allowed. It was a management failure. I think it should have been pounded on by the regulators, but that really didn't happen until it was too late. To me, that's a better solution than just throwing capital. I mean, capital is really important. That is a fundamental element of confidence that the public can have. But capital doesn't replace incompetence, so you really need both to be able to do that. Capital levels in the US are higher than almost anywhere else in the world. I think it is a strongly capitalized industry. But again, there were some management failures, and regulatory oversight could have been more robust.

Well, we all share the same goal. We all want a strong industry. We want high confidence from the public in these institutions. We think that contributes to not only the success of Western Alliance but the industry at large and really moves the economy along. I mean, banks are the primary provider of credit. That really is the engine for the economy. So pushing that forward, we all share that same goal.