The CEOs of the United States' largest banks including JPMorgan Chase (JPM), Citigroup (C), Wells Fargo (WFC), and Goldman Sachs (GS) are testifying before the Senate Banking Committee on Wednesday. The CEOs are arguing that new proposed banking regulations would hurt the US economy. Banking analyst Meredith Whitney of Meredith Whitney Advisory Group, tells Yahoo Finance's Jennifer Schonberger that the CEOs have "made their case very clear" that the proposed regulations are "ham-fisted."
Whitney says the proposals will "hurt the consumer," adding that she is surprised how politicized the hearing has been given the impact these proposals could have lawmakers' constituents.
When it comes to housing, Whitney expects the sector will continue to feel pain next year, because "what now is a demand-supply imbalance is going to invert and it will be a supply-demand imbalance."
Whitney spoke more about her outlook for housing at Yahoo Finance Invest earlier this year, a conversation you can watch here.
For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.
Video Transcript
JENNIFER SCHONBERGER: The CEOs of the nation's largest banks are testifying right behind me, making their case against the proposed capital requirements, saying it would hurt lending, it would hurt the economy, and it would increase inflation. Here for reaction, I would like to bring in Meredith Whitney, CEO of Meredith Whitney Advisory Group. You were just down there in the hearing and listening, your reaction.
MEREDITH WHITNEY: It's a very expensive meeting, right? And it's probably a misallocation of time for these guys, but they show up on the Hill every year to do this event. And look, they've made their case very clear. This has taken 10 years-- 10 years in the making and it's absolutely ham fisted.
I'll quote Jamie Dimon who said that planning-- sorry, proposing and then studying later is a very dangerous strategy. And what they mean by that is they're asking these questions about what Basel III Endgame increase capital will do to lending, specifically lending to small businesses and low-income consumers. And it's bad, right, because as you drive more banking out of the regulated banking system and into the non-regulated banking system that isn't required to invest in community-- in the community Reinvestment Act, you have more of that going to predatory lenders. And lending will just become that much more expensive.
And I think that's what you've seen over the last 10 years, 12 years. Whereas, these guys used to dominate the mortgage industry and now 70% of the mortgage industry is done outside of the banking system. So that's just one example.
One of the things that they talked about is access to mortgages for first time mortgages-- first time home buyers, which has been a really focus-- an area that I've been focusing on for the past year, which is, you know, mortgages and home ownership is at the lowest it's been in terms of younger individuals. And home ownership, the average homeowner is getting older, and older, and older. So it's a very important issue and should be a very important issue for these senators because that's their constituents. Yet the proposal is under the system, under the Basel III Endgame proposal are going to hurt the consumer. That's just a fact.
One thing that impresses me is how politicized this has been in terms of you have senators only showing up when they're going to be on camera. And the senators that are in the room aren't paying attention. And so when the CEOs were giving formal presentations, you had senators moving around and talking to each other.
So this is why I'm here because you need to read the room and it doesn't seem as if the-- it doesn't seem as if the proposers of this really damaging legislation are taking it that seriously. Whereas, the impact for the banks at hand is significant.
JENNIFER SCHONBERGER: Do you think this is going to create more risk in the financial system? You mentioned the notion of a lot of activity moving out of the regulated banking sector.
MEREDITH WHITNEY: No, no, I don't think there's going to be risk for the system. I think the risk is for the US consumer, which is going to be capital is going to be harder to come by for small businesses and the individual and it's going to be more expensive. So that's the risk. It's not systemic risk by any measure. I think within the banking industry--
JENNIFER SCHONBERGER: How much more expensive are we going to see mortgages as a result of this? How is that going to impact housing?
MEREDITH WHITNEY: I think you could see-- well, for starters I think this is for first time buyers. So housing, I think, is going to go down. We've discussed this in 2024 because I think what now is a demand-supply imbalance is going to invert and it will be supply-demand imbalance.
And, you know, 40% of homeowners don't have a mortgage and those are the older homeowners. These are what we're talking about in terms of its first time buyers and the availability of mortgages for them. I think you could see-- it depends on where rates are in terms of the percentage increase, but where they are now, a 25%, 30% increase in mortgage rates.
JENNIFER SCHONBERGER: OK, so then given that, it seems like this is going to cause more harm than good. Do you think that these capital requirements are needed? Should they be completely started again from scratch?
MEREDITH WHITNEY: I want to explain something in the simplest terms. So banks have been-- since the crisis have been required to increase capital. And it's, sort of, a layer on of capital.
You have the SIFI buffer. You have the regulatory capital that they've always had to have, then you have the SIFI buffer. And this proposal is basically 25% increased capital on top of that.
Now, the Basel III Endgame, which will apply to the European banks and all non-US banks, they're starting from scratch with that. So you're adding that level, an additional level to the bank's capital that they're already well capitalized. So I don't think that any of this additional capital would have prevented Silicon Valley Bank failure or anything necessarily systemic. What Brian Moynihan, CEO of Bank of America said is basically, the increased capital proposal will just require the banks hold more capital and lend the equivalent less capital out in the system. That doesn't help anybody and I don't think that's what American consumers or voters want.
JENNIFER SCHONBERGER: There is also talk about a lot of this higher capital flowing through to hedging that is going to hit the consumer. Do you think that this proposal will be inflationary?
MEREDITH WHITNEY: This is exactly what I was talking about. Inflationary insofar as cost of capital will just be higher. So that from an inflation standpoint, from that perspective, yes, in terms of it will be more expensive for many people to access credit.
