Regional banks are obsolete and need to be allowed to fail, according to Shark Tank star and famed entrepreneur Kevin OLeary.
Speaking to Bloomberg TV on Tuesday, OLearyan investor, founder, television personality and author of several books on financial literacysaid it would be better to have a greater number of large banks than a slew of regional banks, noting that this was a proven model in many countries including the U.K., Canada and Australia.
The reasons for regional banks that were important 60 or 100 years ago through the differentiation of the economy in different parts of the country makes no sense anymore because we have digital banking97% of banking is done online, he argued. But the real issue is the lack of confidence in the management remember, we started with 20,000 regional banks, were down to 4,500. What percentage of these banks are run by idiots? We dont know. Each week its a rolling disclosure of an upside down balance sheet, poor management.
Regulators seized San Francisco-based regional bank First Republic last week and sold the majority of its assets to JPMorgan, after customers worried about the struggling lenders financial health withdrew more than $100 billion.
The collapse marked the third American bank failure in just two months and the second biggest in U.S. history, after fellow regional lenders Silicon Valley Bank and Signature Bank failed within days of one another in March.
Silicon Valley Bank was bought by North Carolinabased First Citizens Bank in the weeks following its failure, while Signature Bank was quickly taken over by New York Community Bancorp, parent company of Flagstar Bank.
Obsolete system
OLeary argued on Tuesday that because the regional banking system has become obsolete in the U.S., the financial system should let the ones run by idiots go to zero.
Thats the great thing about the markets, it finds the bad managers, culls them, and eliminates them, OLeary said. We have to let that happen here. So many idiot managers in banking.
The Shark Tank star also revealed during Tuesdays interview that he is refusing to invest money in companies that keep their cash with regional lenders.
The real heart of the issue is, and Ive told this to all our portfolio companiesgive me a reason that you would keep any of the cash I invested in your company in a regional bank, he said. Thats question number one. Why do I have to put any cash at risk? Get it out of there, move it into one of the major money center banks, otherwise we wont lend you any more, or buy any more of your equity. And Im not the only person doing this, this is happening every single hour.
OLeary isnt the only high-profile investor to argue in recent days that the number of U.S. banks needs to be trimmed.
Speaking at the Milken Institute Global Conference in Beverly Hills last week, Todd Lemkin, CIO of alternative asset management firm Canyon Partners, said the recent banking failures were a sign that regulators were overwhelmed by too many institutions in the financial system.
We need a consolidation, he insisted. We need less banks.
Meanwhile, famed investor Bill Ackman also threw cold water on the prospects of the regional banking system.
In a tweet last Wednesday, the founder and CEO of Pershing Square Capital Management cast a grim assertion in relation to Americas smaller banks.
Banking is a confidence game, he wrote. At this rate, no regional bank can survive bad news or bad data as a stock price plunge inevitably follows.
