Bullard is right, bank failures unlikely to lead to recession: Strategist

St. Louis Fed President James Bullard says he doesn't think the fallout from recent bank failures will tip the economy into a recession. Horizon Investments CIO Scott Ladner agrees.

Ladner told Yahoo Finance's Seana Smith and Dave Briggs there's a simple reason that the regional bank problems haven't really spread, "regional banks don't really do business with each other. They do business with consumers. The thing that caused all the contagion, all the problems in 2008 was that the large banks trade with each other."

When question about the commercial real estate market and its ties to regional banks, Ladner said that, unlike with residential real estate, "it's not unusual to see 20-30% down on a commercial real estate deal. That obviously was not the case in 2006-2007, in the lead up to the financial crisis."

KEY VIDEO MOMENTS:
0:12 On James Bullard's Inflation comments
0:25 Difference between regional banks and big banks
1:21 Regional banks and commercial real estate

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SEANA SMITH: Let's start with what we just heard from James Bullard earlier today. He's not worried about a credit crunch. He thinks that the Fed should stick to raising rates in their fight against inflation. What's your reaction to that?

SCOTT LADNER: Well, look, I mean, I think he's largely right. I mean, we've not seen any sort of contamination or contagion effects stemming out of some of this [INAUDIBLE] that we've seen out of the regional banks. And there's a pretty simple reason for that. Regional banks don't really do business with each other. They do business with consumers.

And so the thing that caused all the contagion, all the problems in 2008, was that the large banks trade with each other, and they had a lot of interconnectivity amongst them. That's just not the case with how regional banks act. They're more like a buffer system to the financial economy. And so we think he's right in that there are probably going to be some losses. There may be a couple more failures. But we do think it's going to end up being isolated, and we do think we're going to kind of get through this reasonably unscathed with respect to the broader economy.

DAVE BRIGGS: I would love to ask Mr. Bullard about regional banks who do a ton of business with commercial real estate. And that could be a major issue ahead, Scott. What could that lead us to in this economy?

SCOTT LADNER: You know, Dave, you're right. That is the bulk of community banks and kind of regional banks as a business. They do tons and tons of commercial real estate lending because they operate in the local markets, and they understand the local dynamics associated with commercial real estate lending. But there's one thing that there's a big difference between commercial real estate lending and residential real estate lending, and that is, basically, the amount of cushion that banks require purchasers of commercial real estate to put down.

So it's not unusual to see between 20% and 30% down on a commercial real estate deal. That, obviously, was not the case back in 2006, 2007, in the lead-up to the financial crisis when we have all these liar loans and kind of no money down deals. There wasn't any cushion. There wasn't any sort of room for error in that market. There's a lot of room for error in the commercial real estate market. Not only down payments, but we've seen a lot, tremendous appreciation in commercial real estate in the last three or four or five years.

And seeing the combined effects of that appreciation of the asset values, and plus the money down that buyers have had to take to put in to the deal to even get it done in the first place, does give these banks a fair amount of cushion with respect to the asset values relative to the loan values outstanding.

So while we could have a liquidity mismatch, if banks end up having to take some of these properties back, we don't think it's going to end up being any sort of cascading fast moving effects. And so I wouldn't say that there's going to be zero problems emanating from the commercial real estate deals. But we don't think it's going to lead to anything really, really material in the broader economy because of those effects that I just mentioned.