Latest / Stephanomics / Why the Next Victim of the Banking Crisis Is Small Business

Transcript

Why the Next Victim of the Banking Crisis Is Small Business · Stephanomics

• 0:00
  Speaker 1: First Republic Bank has become the second largest bank failure
• 0:04
  Speaker 1: in US history.
• 0:05
  Speaker 2: Another Bay Area bank goes down.
• 0:07
  Speaker 3: We're back with some breaking news this morning.
• 0:09
  Speaker 4: First Republic Bank has been taken over by federal regulators
• 0:12
  Speaker 4: and sold to JP Morgan.
• 0:14
  Speaker 1: Chase as America's bank and crisis flares up again. In
• 0:17
  Speaker 1: a statement this.
• 0:18
  Speaker 5: Morning, Hello Stephanomics, here the podcast that brings you the
• 0:26
  Speaker 5: global economy. We're back a few weeks later than expected,
• 0:29
  Speaker 5: but just in time to talk about the collapse of
• 0:32
  Speaker 5: First Republic, the fourth US bank to hit the rails
• 0:36
  Speaker 5: since we went off air at the end of January.
• 0:39
  Speaker 5: Why are these smaller lenders under pressure and if they
• 0:42
  Speaker 5: stop lending, is that going to be enough to tank
• 0:45
  Speaker 5: the economy? I found myself asking these questions in Los
• 0:48
  Speaker 5: Angeles this week at the Milklin Institute's big annual conference.
• 0:53
  Speaker 5: It's not a bad place to get expert answers. Some
• 0:56
  Speaker 5: of the biggest names in US finance were here, along
• 0:59
  Speaker 5: with some senior US politicians and the Managing Director of
• 1:03
  Speaker 5: the International Monetary Fund, Chris Selina Gorgieva. I'll play you
• 1:06
  Speaker 5: my chat with her and with Milkin's chief economist William
• 1:10
  Speaker 5: Lee in a few minutes. But with the best will
• 1:13
  Speaker 5: in the world, these movers and shakers aren't going to
• 1:16
  Speaker 5: be able to tell you how it feels to be
• 1:18
  Speaker 5: at the sharp end of this slow moving US credit crunch.
• 1:22
  Speaker 5: For that, we ask Bloomberg's Mike Sasso to go to Florida.
• 1:28
  Speaker 1: Pickleball has exploded in popularity across the country at.
• 1:31
  Speaker 6: Kickleball and now Picklebob, popularity has exploded, with an estimated
• 1:37
  Speaker 6: more than four point eight million players nationwide.
• 1:40
  Speaker 7: If a pickleball business is having trouble getting alone these days,
• 1:44
  Speaker 7: then you know the credit crunch sweeping the US must
• 1:47
  Speaker 7: be syric. In Nakatie, Florida, a suburb in the fast
• 1:54
  Speaker 7: growing Jacksonville area, Lauren Garvey and her husband are eager
• 1:59
  Speaker 7: to open a new bar and grill with quartz for pickleball,
• 2:03
  Speaker 7: the popular paddle sport that's kind of like tennis for
• 2:06
  Speaker 7: the everyman. They want to combine it with a restaurant,
• 2:10
  Speaker 7: either by creating their own spot or buying a franchise
• 2:14
  Speaker 7: of Chicken and pickle where you can gobble down some
• 2:18
  Speaker 7: wings with a beer then hit the quartz.
• 2:23
  Speaker 1: When I started noticing pickleball was when you know maybe
• 2:26
  Speaker 1: five seven years back, when my grandmother was in her
• 2:29
  Speaker 1: retirement community and she was playing pickleball and she was
• 2:32
  Speaker 1: raving about it, and it sounded like such a funny
• 2:34
  Speaker 1: term until we started noticing more and more people playing
• 2:38
  Speaker 1: in our community in Nokti, and there were multiple pickleball
• 2:44
  Speaker 1: courts and they're constantly full in the mornings. When I
• 2:47
  Speaker 1: take walks past there, I'll see people playing pick a ball,
• 2:50
  Speaker 1: you know, as early as seven am, and they're there
• 2:52
  Speaker 1: until the sun goes down. So we just realized what
• 2:56
  Speaker 1: kind of opportunity was there.
• 2:59
  Speaker 7: But like so many other lately, the Garvey's entrepreneurial dreams
• 3:03
  Speaker 7: are a little more remote than they were just a
• 3:05
  Speaker 7: few weeks ago. Getting a two and a half million
• 3:09
  Speaker 7: dollar loan from their bank once looked all but certain,
• 3:13
  Speaker 7: but when the best rate they could get was around
• 3:15
  Speaker 7: nine percent or ten percent, the Garvey's put the brakes on.
• 3:20
  Speaker 8: You know.
• 3:20
  Speaker 1: It got to that point where when we were told
• 3:23
  Speaker 1: that the interest rates were going to be at ten
• 3:24
  Speaker 1: plus percent, we realized that's just higher than what we
• 3:27
  Speaker 1: could afford or what made sense. And there's a high
• 3:29
  Speaker 1: probability that you know, they wouldn't approved the concept or
• 3:32
  Speaker 1: the loan anyway, and obviously it doesn't support our financial model.
• 3:37
  Speaker 1: We you know, it would make it difficult for us
• 3:39
  Speaker 1: to even break even, let alone make money time soon,
• 3:43
  Speaker 1: so you know, we had to cut that off.
• 3:48
  Speaker 9: It was expected over the weekend as well.
• 3:49
  Speaker 3: Let's get a little bit more insight on the collapse
• 3:51
  Speaker 3: of Silicon Valley Banks is rapid.
• 3:53
  Speaker 1: How quickly this bank went into total collapse. It was
• 3:56
  Speaker 1: just a couple of days, and it happened.
• 3:58
  Speaker 9: In the middle.
• 3:58
  Speaker 7: The banking turmoil that sunk Silicon Valley Bank in rattled
• 4:02
  Speaker 7: markets worldwide. So far hasn't led to the wholesale crisis
• 4:07
  Speaker 7: that some feared. Yet it's causing banks in other lenders
• 4:11
  Speaker 7: to think harder about making loans, and it's reducing the
• 4:15
  Speaker 7: size of the loans they do make. This credit crunch
• 4:19
  Speaker 7: is more than a little worrying for the world's biggest economy,
• 4:23
  Speaker 7: especially as the US Federal Reserve met this week in
• 4:27
  Speaker 7: raised interest rates for their tenth and possibly final time
• 4:32
  Speaker 7: of the current cycle. Those higher borrowing costs played a
• 4:36
  Speaker 7: role in stoking today's banking trouble. A year ago, the
• 4:41
  Speaker 7: US Central Bank launched an aggressive campaign to squelch the
• 4:45
  Speaker 7: worst inflation America had seen in forty years. Suddenly, new
• 4:51
  Speaker 7: car loans that once had low four point four percent
• 4:54
  Speaker 7: interest rates now carry burdensome seven percent rates. And for
• 4:59
  Speaker 7: a min America's mom and pop shops, the average loan
• 5:03
  Speaker 7: backed by the US Small Business Administration has nearly doubled
• 5:07
  Speaker 7: to more than eleven percent interest. It was too much
• 5:11
  Speaker 7: to stomach for the Garvey's.
• 5:13
  Speaker 1: Yeah, we kind of got to the point where we
• 5:14
  Speaker 1: just realized it was too high for us.
• 5:21
  Speaker 2: Only about twenty percent of the money in the United
• 5:24
  Speaker 2: States is in currency and coin. The other eighty percent
• 5:28
  Speaker 2: is check with money, and that check with money is
• 5:32
  Speaker 2: in the form of deposits in our commercial banking system
• 5:36
  Speaker 2: commercial banks.
• 5:37
  Speaker 7: Americans have generally parked their money in banks for a
• 5:40
  Speaker 7: long time without moving it, but they started to withdraw
• 5:45
  Speaker 7: when the FED began raising rates last year. When svb's
• 5:49
  Speaker 7: troubles made headlines in March. In First Republic and Signature
• 5:54
  Speaker 7: Bank soon followed, depositors got spooted and yanked their cash
• 5:58
  Speaker 7: out calls all three to.
• 6:00
  Speaker 8: Fail, and as those deposits flow out of the bank,
• 6:05
  Speaker 8: that severely cuts down on their ability to make new loans.
• 6:10
  Speaker 7: Here's Ben Johnston Enough Capitis a lender to small businesses.
• 6:15
  Speaker 8: And in fact many cases, these banks are needing to
• 6:19
  Speaker 8: shed assets and courtail lending in the future in order
• 6:23
  Speaker 8: to make sure that they can supply that outflow of deposits.
• 6:28
  Speaker 7: Eventually, bank regulators in a coalition of large banks stepped
• 6:32
  Speaker 7: in to quell the crisis, but many see troubling signs
• 6:36
  Speaker 7: for the bank loans and the companies that depend on them.
• 6:41
  Speaker 7: Just this week, JP Morgan agreed to acquire First Republic
• 6:45
  Speaker 7: Bank after it was seized by authorities. John Tuhig works
• 6:51
  Speaker 7: for the investment bank Raymond James Financial, overseeing a unit
• 6:56
  Speaker 7: that packages up loans and trades them. He normally surveyed
• 7:01
  Speaker 7: about two hundred regional banks recently and found that about
• 7:05
  Speaker 7: a quarter had toughened their lending standards after svb's collapse.
• 7:10
  Speaker 10: They're charging higher rates, so that again that comes back
• 7:14
  Speaker 10: to liquidity, right, their cost of funds is going up.
• 7:18
  Speaker 10: It's not necessarily credit, but I mean if they have
• 7:21
  Speaker 10: to do a borrowing or have to do a CD special,
• 7:23
  Speaker 10: they're borrowing costs or four or five percent today, they
• 7:26
  Speaker 10: have to charge something north of that, right, But you're
• 7:29
  Speaker 10: starting to see lending slow because of those higher rates.
• 7:35
  Speaker 7: Meantime, the amount of corporate debt trading at distress levels
• 7:39
  Speaker 7: has soared by twenty eight percent since SVB collapsed in March,
• 7:45
  Speaker 7: and bankruptcies are climbing, especially among small firms with money
• 7:52
  Speaker 7: harder to get at traditional banks. More firms likely will
• 7:55
  Speaker 7: turn to high interest alternative lenders like Cappitis. The New
• 8:00
  Speaker 7: York based company offers loans in other forms of credit
• 8:04
  Speaker 7: with interest rates starting in the teens and going up
• 8:07
  Speaker 7: from there. Despite its priceier loans, the companies saw loan
• 8:12
  Speaker 7: applications spike to their highest level ever in March. Here's
• 8:17
  Speaker 7: chief operating Officer Ben Johnston again, and.
• 8:20
  Speaker 8: We expect that volume to continue to be at quite
• 8:25
  Speaker 8: high levels for the foreseeable future.
• 8:33
  Speaker 7: Back in Florida, the Garvey's are going to wait out
• 8:36
  Speaker 7: the high interest rates and credit crunch, hopefully returning to
• 8:40
  Speaker 7: their pickleball, grill and bar concept when things settle down.
• 8:46
  Speaker 1: No doubt that it would be profitable and that the
• 8:48
  Speaker 1: demand is there, and it's something that we would love
• 8:50
  Speaker 1: to pursue down the line, especially if the interest rates
• 8:54
  Speaker 1: come down. It's not going to come off of our radar.
• 8:56
  Speaker 1: We're going to continue to proactically pursue it. There's just
• 9:00
  Speaker 1: so much demand for it, especially in this area.
• 9:16
  Speaker 5: So we're sitting in a crowded hall at the Milkin
• 9:20
  Speaker 5: Institute's big annual shindig in LA at the kind of
• 9:25
  Speaker 5: charmingly old fashioned Beverly Hilton, and I'm delighted to be
• 9:30
  Speaker 5: joined by William Lee, who's the Milcan Institute's chief economist
• 9:35
  Speaker 5: and often helps us explain what's going on in the
• 9:38
  Speaker 5: global economy. So I appreciate William.
• 9:40
  Speaker 6: Well, I've had the privilege of being on Bloomberg Radio
• 9:43
  Speaker 6: in Asia, so I visit almost every Bloomberg office in
• 9:47
  Speaker 6: places where I've worked my entire professional life.
• 9:49
  Speaker 5: And somehow we've not had you on Stephanomics. So I'm
• 9:52
  Speaker 5: glad we finally resolved that problem. I want to talk
• 9:55
  Speaker 5: to you about lots of things, but let's get into
• 9:59
  Speaker 5: the all this talk of credit crunch. And you know,
• 10:03
  Speaker 5: obviously this conference this week began with the resolution of
• 10:10
  Speaker 5: the First Republic situation, the JP Morgan buying this bank.
• 10:15
  Speaker 5: We've had four US banks fail in the last few
• 10:18
  Speaker 5: years for a few months, and not all of them big,
• 10:21
  Speaker 5: but certainly raising questions about mistakes being made in their
• 10:26
  Speaker 5: business model, but also the impact of this big increase
• 10:29
  Speaker 5: in interest rates that we've had in the US. So
• 10:33
  Speaker 5: I guess I should ask you how concerned are you
• 10:38
  Speaker 5: by the state of the US banking system, which of
• 10:41
  Speaker 5: course lends to a lot of households and a lot
• 10:43
  Speaker 5: of companies, and if they can't lend, then the economy
• 10:48
  Speaker 5: might be affected.
• 10:48
  Speaker 6: You know, when you bump into anybody here at Milkin
• 10:50
  Speaker 6: as an icebreaker, they always ask you. In fact, they've
• 10:53
  Speaker 6: been asking me all morning, what do you think of
• 10:55
  Speaker 6: happened in the First Republic? Is this the start of
• 10:58
  Speaker 6: something really big in the banking is just them? Will
• 11:00
  Speaker 6: the banking system be in trouble? And I think if
• 11:03
  Speaker 6: you're given answer of the sort that says, oh gee,
• 11:06
  Speaker 6: the credit crunch might lead to a recession, they shake
• 11:08
  Speaker 6: your hand and they leave because they know. The professionals
• 11:12
  Speaker 6: here are capital markets people. They know that corporate America
• 11:17
  Speaker 6: raises most of its money through debt and equity, and
• 11:20
  Speaker 6: bank lending right now has become much less important source
• 11:23
  Speaker 6: of capital for major corporations. Where banks are still very
• 11:28
  Speaker 6: important would be among the smaller and medium sized businesses
• 11:32
  Speaker 6: and in certain sectors like real estate. They're the local banks,
• 11:37
  Speaker 6: the small and medium sized regional banks are incredibly important
• 11:40
  Speaker 6: in supplying money to these particular businesses. So if indeed
• 11:45
  Speaker 6: there were a banking credit crunch, and there's a banking
• 11:48
  Speaker 6: crisis that prevented banks from lending, you'll see the impact
• 11:52
  Speaker 6: mainly in those areas. Now, when I say it's only
• 11:56
  Speaker 6: eleven percent of total corporate borrowing, do you think, oh
• 11:59
  Speaker 6: my god, that's such a small number. Why are we
• 12:00
  Speaker 6: so worried about it? Well, small businesses account for the
• 12:04
  Speaker 6: bulk of the employment, and the real estate market is
• 12:07
  Speaker 6: absolutely vital to a lot of people, because, let's face it,
• 12:10
  Speaker 6: we didn't want to go through two thousand and eight again.
• 12:13
  Speaker 6: But as far as tanking the entire use economy is concerned,
• 12:17
  Speaker 6: that's unlikely to happen unless we really have a very
• 12:20
  Speaker 6: severe banking crisis that spreads into the capital markets that
• 12:23
  Speaker 6: prevents companies from raising money there.
• 12:25
  Speaker 5: So what we're basically saying is that you know, a
• 12:27
  Speaker 5: mum and pop store or a small business can't go
• 12:31
  Speaker 5: and issue debt, issue a bond from mom and pop.
• 12:36
  Speaker 5: They have to go to their local bank. And so
• 12:38
  Speaker 5: whether or not that bank is feeling able to lend,
• 12:40
  Speaker 5: and how tough requirements that are is going to make
• 12:46
  Speaker 5: a difference on whether or not they can get that loan.
• 12:49
  Speaker 5: But I guess if you're the FED, that's kind of
• 12:52
  Speaker 5: why you're raising interest rates.
• 12:53
  Speaker 3: Right exactly.
• 12:54
  Speaker 6: One of the reasons why the FED is so worried
• 12:57
  Speaker 6: about the efficacy and the power of mantrap policy these
• 13:00
  Speaker 6: days is that they have been raising rates really almost
• 13:03
  Speaker 6: at an unprecedented rate, from zero to now near five percent,
• 13:07
  Speaker 6: and they still see the economy chudging along fairly strongly,
• 13:10
  Speaker 6: and more importantly, the unemployment rate it's three and a
• 13:13
  Speaker 6: half percent. So they're asking themselves, is has the transmission
• 13:17
  Speaker 6: of monetary policy change It somehow has become less powerful. Well,
• 13:21
  Speaker 6: it may have, but certainly the indicator they want to
• 13:25
  Speaker 6: see change is consumers spending easing off. And we heard
• 13:32
  Speaker 6: in today's session Jane Fraser, the head of City Banks,
• 13:36
  Speaker 6: say the top two quintiles of people still have a
• 13:40
  Speaker 6: lot of spending power. And it really struck me to say, yeah,
• 13:44
  Speaker 6: you're right, it's the top two quintiles, But what about
• 13:46
  Speaker 6: the rest of the population. They're going to paycheck to paycheck,
• 13:49
  Speaker 6: they're using their credit cards, So we have two Americas.
• 13:54
  Speaker 6: In America where the very rich are comfortably spending and
• 13:57
  Speaker 6: going on vacation and filling up all the airplane going
• 14:00
  Speaker 6: to Europe, but we have the bulk of US population
• 14:03
  Speaker 6: still suffering from not having enough money to meet their
• 14:08
  Speaker 6: daily needs because prices keep going up faster than their income.
• 14:11
  Speaker 6: So when the Fed wants to ease inflation, the first
• 14:15
  Speaker 6: thing they want to do is start to get the
• 14:17
  Speaker 6: economy to slow down so that people don't demand as
• 14:20
  Speaker 6: much goods and services and so that the price pressures
• 14:24
  Speaker 6: are eased off.
• 14:25
  Speaker 3: And I think that is starting to work now.
• 14:28
  Speaker 6: In the latest GDP numbers, we're starting to see income
• 14:30
  Speaker 6: gross domestic income has actually turned down, and that's a
• 14:34
  Speaker 6: good sign that maybe we will have something that will
• 14:37
  Speaker 6: restrain the economy. And if the banks start to ease
• 14:39
  Speaker 6: off on lending to specifically to businesses that hire a
• 14:42
  Speaker 6: lot of people, more people will get frightened that, my god,
• 14:46
  Speaker 6: my job really is at risk.
• 14:47
  Speaker 3: Maybe I shouldn't be going on that vacation. I can
• 14:49
  Speaker 3: maybe delayed till next year.
• 14:50
  Speaker 5: It's an uncomfortable conversation, though, isn't it, Because we tend
• 14:53
  Speaker 5: to we talk about higher interest rates in the abstract,
• 14:56
  Speaker 5: and maybe we encourage the idea that it's you know,
• 15:00
  Speaker 5: going to just at the edges make people cut their spending.
• 15:03
  Speaker 5: And you talk about holidays, some people think of the
• 15:06
  Speaker 5: holidays a pretty essential item in their basket. But you know,
• 15:11
  Speaker 5: the uncomfortable truth is you the whole point of the
• 15:13
  Speaker 5: policy is to make it harder for people to get alone, right.
• 15:16
  Speaker 6: So I'd rather have the money in my plucket now
• 15:18
  Speaker 6: rather than spending it and then worry that I will
• 15:20
  Speaker 6: get laid off for six months after I come back
• 15:23
  Speaker 6: from my vacation. So I think those are the social
• 15:26
  Speaker 6: issues that I think the FED is well aware of.
• 15:28
  Speaker 6: But there is really only one policy instrument they have
• 15:32
  Speaker 6: to control inflation, and that's by raising interest rates.
• 15:34
  Speaker 5: I guess the only upside of this for people who
• 15:37
  Speaker 5: don't like the sound of working Americans being hurt is
• 15:41
  Speaker 5: that it's pretty tough for banks in the US at
• 15:43
  Speaker 5: the moment for lots of reasons. But this increase in
• 15:46
  Speaker 5: interest rates actually has turned out to be a bit
• 15:48
  Speaker 5: of a problem for them. You know, normally they can
• 15:50
  Speaker 5: make a lot of money from having a big gap
• 15:52
  Speaker 5: between what you can get in a savings account and
• 15:53
  Speaker 5: what they're lending out for but it hasn't quite worked
• 15:56
  Speaker 5: out like.
• 15:56
  Speaker 3: That well it so definitely I'm not sympathetic. I'm sorry.
• 16:00
  Speaker 6: My former boss, Jane Frasier at City is doing quite
• 16:03
  Speaker 6: well because they have a very diversified business model.
• 16:06
  Speaker 3: So those banks that are able.
• 16:08
  Speaker 6: To manage their businesses and manage their risks are doing
• 16:11
  Speaker 6: quite well. What we have seen is that banks that
• 16:14
  Speaker 6: go on the fringes and into fringe markets, like trying
• 16:17
  Speaker 6: to service the venture capitalists in Silicon Valley, are going
• 16:21
  Speaker 6: to really high net worth people and saying come do
• 16:23
  Speaker 6: business with me, and offering very very specialized services to them.
• 16:27
  Speaker 6: Those business models that are less diversified are also more risky.
• 16:33
  Speaker 6: And what we've discovered is that as interest rates went up,
• 16:36
  Speaker 6: they could no longer fund these special services as they
• 16:39
  Speaker 6: did before with cheap money, and once funding became expensive,
• 16:43
  Speaker 6: suddenly their customers noticed, oh gee, I can get better
• 16:46
  Speaker 6: services or better return someplace else. And guess what rich
• 16:50
  Speaker 6: people do. They really move their money fast when they
• 16:52
  Speaker 6: see higher returns now. Silicon Valley also operated with no
• 16:57
  Speaker 6: chief risk officer for nine months.
• 17:00
  Speaker 3: They didn't have the kind.
• 17:03
  Speaker 6: Of corporate governance that held them accountable for making management
• 17:07
  Speaker 6: mistakes similarly, but First Republic also was subject to not
• 17:12
  Speaker 6: enough corporate governance that said, hey, you should divorse by
• 17:15
  Speaker 6: your business model. So the fact that individual banks like
• 17:17
  Speaker 6: that they are not well run, failed is a good thing.
• 17:20
  Speaker 6: What we actually do have, which we haven't talked about enough,
• 17:23
  Speaker 6: is a crisis in.
• 17:24
  Speaker 3: Supervision, not regulation.
• 17:26
  Speaker 6: But supervision regulation is for everyone out there is having
• 17:30
  Speaker 6: a lot of bunch of rules and having very stiff
• 17:32
  Speaker 6: rules or less stiff.
• 17:33
  Speaker 3: Rules applying to various banks.
• 17:35
  Speaker 6: But a supervisor supposed to come in and actually say, hey,
• 17:39
  Speaker 6: you're not following the rules. And the vice chairman Barre testified,
• 17:45
  Speaker 6: we gave these banks three notices saying you've got to
• 17:50
  Speaker 6: correct what you're doing. That's like saying when I was
• 17:53
  Speaker 6: in grade school, my teacher said, this is going to
• 17:55
  Speaker 6: go on your permanent record if you don't correct yourself.
• 17:57
  Speaker 3: Well, these guys just said, well, so what now?
• 18:01
  Speaker 6: From where you come from the Bank of England, the
• 18:03
  Speaker 6: worst fear of every banker is to be invited to
• 18:06
  Speaker 6: tea at the Bank of England.
• 18:07
  Speaker 5: Back in the day, anyway, I'm not sure not just
• 18:10
  Speaker 5: because the quality of the t we should say.
• 18:11
  Speaker 3: Well, that could be true.
• 18:13
  Speaker 6: But here the supervisors allowed these banks to continue, and
• 18:16
  Speaker 6: that was the sin that really cannot be forgiven. And
• 18:19
  Speaker 6: the fact that the FED on internal review said, oh gee,
• 18:23
  Speaker 6: you know, this era of deregulation from Trump has caused
• 18:27
  Speaker 6: our supervisory staff to feel that they really shouldn't be
• 18:30
  Speaker 6: enforcing regulations.
• 18:31
  Speaker 3: I'm sorry. That is not a reasonable excuse for supervisors
• 18:36
  Speaker 3: pointing out in their jobs.
• 18:38
  Speaker 5: But there is something that is not specific to those
• 18:42
  Speaker 5: banks that you've talked about, or even the band supervision
• 18:46
  Speaker 5: which we saw in these crises, all these failures of
• 18:49
  Speaker 5: these banks. There's, as you mentioned, the sort of digital
• 18:53
  Speaker 5: bank run that can happen overnight billions of dollars in
• 18:57
  Speaker 5: twenty four hours going out of senecon valid bank example,
• 19:01
  Speaker 5: which feels like a game changer, but also now a
• 19:07
  Speaker 5: pretty large gap between where short term interest rates are
• 19:12
  Speaker 5: and still where most banks are, you know, off what
• 19:15
  Speaker 5: are offering in terms of savings rates. Now you look
• 19:18
  Speaker 5: at a back that is one of the main ways
• 19:19
  Speaker 5: they make money by having that gap and hoping that
• 19:22
  Speaker 5: kind of people won't notice, or they talk about the
• 19:24
  Speaker 5: deposits being sticky. You know, it does seem to be
• 19:28
  Speaker 5: relevant to every bank if it's going to be harder
• 19:31
  Speaker 5: to do to make money from that in the future.
• 19:33
  Speaker 3: Absolutely, And so you have a business model.
• 19:38
  Speaker 6: Every bank does what the fancy term in business school
• 19:40
  Speaker 6: they call it maturity transformation, right, which means, you know,
• 19:44
  Speaker 6: you're ripping the consumer up, you rip off the depositors,
• 19:46
  Speaker 6: and you give you know, very expensive loans to to
• 19:49
  Speaker 6: your to your clients. What they did instead was, in
• 19:52
  Speaker 6: the case of first of Public, they gave very cheap
• 19:55
  Speaker 6: loans to these very rich people to attract them to
• 19:58
  Speaker 6: come to their to their bank. And while the amount
• 20:01
  Speaker 6: of deposits they were paying off were also low, the
• 20:06
  Speaker 6: fact that they could fund these very low interest mortgages
• 20:09
  Speaker 6: and very large size mortgages was really at the heart
• 20:12
  Speaker 6: of their business model, aside from the touch aphead, you know,
• 20:15
  Speaker 6: you can call your bank or any time stuff. So
• 20:17
  Speaker 6: when interest rates rose, what's the first thing a banker
• 20:21
  Speaker 6: knows that? You have to match your assets and liabilities.
• 20:25
  Speaker 6: Maturity matching is something that every risk manager learns from
• 20:29
  Speaker 6: the first day.
• 20:30
  Speaker 3: Why didn't they do that?
• 20:32
  Speaker 6: I'm sorry, it wasn't a surprise that the FED started
• 20:34
  Speaker 6: raising rates four or five maybe even six percent interest rates.
• 20:39
  Speaker 6: Not to have that as part of a contingency plan
• 20:41
  Speaker 6: is a failure of bank management.
• 20:44
  Speaker 5: Fascinating Well, William Lee, thank you very much.
• 20:46
  Speaker 6: Well Seth, It's been a pleasure to talk to you,
• 20:48
  Speaker 6: and I really feel privileged to be in your presence.
• 21:00
  Speaker 2: Now.
• 21:00
  Speaker 5: He's not the only one saying I told you so
• 21:02
  Speaker 5: to First Republic and to the US supervisors who were
• 21:05
  Speaker 5: asleep at the wheel. Crystallina Gorgieva said more or less
• 21:09
  Speaker 5: the same thing when I spoke to her in the
• 21:11
  Speaker 5: opening session of this milk and conference. So, Crystallina, you
• 21:18
  Speaker 5: have the great and good of American finance, well at
• 21:20
  Speaker 5: least the great of American finance arrayed in front of
• 21:25
  Speaker 5: you as head of the IMF. What do you wake
• 21:29
  Speaker 5: up thinking about in the morning that you want them
• 21:31
  Speaker 5: to think about more.
• 21:34
  Speaker 4: The unthinkable.
• 21:37
  Speaker 9: What we have lived through in the last years has
• 21:41
  Speaker 9: been series of unthinkable events, the pandemic, the war in Ukraine,
• 21:48
  Speaker 9: the rapid jump of interest rates after many, many, many
• 21:53
  Speaker 9: years of staying Lowell. And it is upon all of
• 21:58
  Speaker 9: us to anticipate shocks and be ready to act when
• 22:06
  Speaker 9: they occur, because they will be coming. So if your
• 22:10
  Speaker 9: risk officers are only thinking about the predictable and well
• 22:14
  Speaker 9: known from history. Risks, they're falling a little short, so
• 22:20
  Speaker 9: give them a little push to think of what.
• 22:24
  Speaker 4: Is so impossible to think.
• 22:28
  Speaker 5: We're clearly still seeing continued strength on the consumer side
• 22:31
  Speaker 5: of the economy in the US and indeed other places
• 22:34
  Speaker 5: in response to this massive increase in interest rates, But
• 22:37
  Speaker 5: there are building concerns of a credit crunch, a sort
• 22:42
  Speaker 5: of slow motion credit crunch. Do you think we're underestimating
• 22:45
  Speaker 5: the impact of those rate rises? Where are you looking?
• 22:48
  Speaker 10: Well?
• 22:48
  Speaker 9: The first we need to accept that we have handled
• 22:53
  Speaker 9: incredibly significant challenges, actually not so badly. In twenty twenty,
• 23:01
  Speaker 9: we were anticipating depression.
• 23:03
  Speaker 4: Did not happen.
• 23:04
  Speaker 9: Yes, the world economy is shrank by three point one percent,
• 23:08
  Speaker 9: but that was far from our worst fears.
• 23:12
  Speaker 4: So resiliency is for real.
• 23:14
  Speaker 9: And actually, since it is morning and we need to
• 23:16
  Speaker 9: all wake up, I'm gonna ask you to give a
• 23:20
  Speaker 9: big round of applause to yourself because we have.
• 23:23
  Speaker 4: Lived through these events.
• 23:27
  Speaker 5: Shameless pandering to the audience, but of course there is
• 23:31
  Speaker 5: a bud here and the bodies.
• 23:35
  Speaker 4: They have not been without consequences.
• 23:39
  Speaker 9: We still have the scarring from the pandemic, the geo
• 23:44
  Speaker 9: political tensions that have been fueled by a Russia's invasion
• 23:48
  Speaker 9: of Ukraine. Are accelerating something that has been already happening,
• 23:54
  Speaker 9: more fragmentation in the world economy that has causing consequences.
• 23:59
  Speaker 9: And as you pointed out to Stephanie, this rapid transition
• 24:05
  Speaker 9: from low interest rates to high interest rates did what
• 24:10
  Speaker 9: should be expected to do. It exposed vulnerabilities in the
• 24:14
  Speaker 9: financial sector. I want to say that this should not
• 24:18
  Speaker 9: be a surprise because it is just not possible to
• 24:22
  Speaker 9: have that jump in interest rates and to find that
• 24:27
  Speaker 9: everybody has matched the liabilities and assets and looked into
• 24:33
  Speaker 9: the interest rates.
• 24:35
  Speaker 4: In a responsible manner.
• 24:38
  Speaker 9: What was a surprise, though, was that it happened in
• 24:40
  Speaker 9: the banking sector, not in the non banking institutions, where
• 24:45
  Speaker 9: we feared that may occur. So what should we be thinking, Well,
• 24:50
  Speaker 9: it hasn't happened in the non banking sector. It doesn't
• 24:53
  Speaker 9: mean that we have a free pass. It doesn't mean
• 24:57
  Speaker 9: that there wouldn't be more vulnerabilities to come.
• 25:01
  Speaker 4: And here is our reality.
• 25:04
  Speaker 9: Growth is slowing down, but inflation is not going down
• 25:12
  Speaker 9: as fast as we wanted to go. And unfortunately, with
• 25:17
  Speaker 9: more protectionism, we are trying cold water on what is
• 25:21
  Speaker 9: an anemic growth to begin with. You want me to
• 25:26
  Speaker 9: finish on a positive site.
• 25:28
  Speaker 4: Sure, well.
• 25:30
  Speaker 9: The positive site is that we have proven to be
• 25:33
  Speaker 9: incredibly resourceful, and I think it is now time to
• 25:39
  Speaker 9: do that to prove it again resourceful.
• 25:42
  Speaker 5: But as you pointed out, also kind of a bit
• 25:44
  Speaker 5: stupid in the sense that we were worried about hidden
• 25:47
  Speaker 5: risks and the non banking sector, and yet right there
• 25:52
  Speaker 5: in plain sight was potential interest rate risks in a
• 25:57
  Speaker 5: digitized world. When you think about the un thinkable, we
• 26:01
  Speaker 5: certainly haven't seen nominal rates at four or five, six
• 26:04
  Speaker 5: percent whatever in a world where money can immediately come
• 26:08
  Speaker 5: out of billions could come out of deposits instantly, and
• 26:12
  Speaker 5: banks have made a lot of money over the years
• 26:14
  Speaker 5: from years of rising interest rates and not passing on
• 26:17
  Speaker 5: those short term interest rate rises. Should that completely change
• 26:20
  Speaker 5: the way we think about financial stability risk?
• 26:22
  Speaker 9: Well, let's first recognize that since the global financial crisis,
• 26:29
  Speaker 9: a lot has been done to strengthen banking sector, to
• 26:33
  Speaker 9: strengthen our financial system. Banks are better regulated, they're better capitalized,
• 26:39
  Speaker 9: and very important decision makers.
• 26:41
  Speaker 4: Policy makers are very fast.
• 26:45
  Speaker 9: This being said, now I'm going to say something that
• 26:50
  Speaker 9: I avoid saying we told you so, the IMF, the
• 26:55
  Speaker 9: IMF rot.
• 26:56
  Speaker 5: The IMF, always saying we told you so.
• 26:58
  Speaker 4: Well in this particular case, read the books.
• 27:01
  Speaker 9: In the In the financial sector assessment we have done
• 27:07
  Speaker 9: for the United States in twenty one and twenty two,
• 27:10
  Speaker 9: we zero in on the problem that blew up the
• 27:16
  Speaker 9: bank here in California.
• 27:18
  Speaker 4: It's there.
• 27:19
  Speaker 9: So there is a bit of complacency and now we
• 27:24
  Speaker 9: saw the price to pay. We saw that you provision
• 27:28
  Speaker 9: has not been quite up to par sol. There are
• 27:30
  Speaker 9: things that can be done to reduce these risks. But
• 27:34
  Speaker 9: you put your finger on something that for all of
• 27:37
  Speaker 9: us is novelty and we are all going to be
• 27:40
  Speaker 9: wrestling with it. It is the speed money can move
• 27:45
  Speaker 9: from one place to another and the role of social media.
• 27:50
  Speaker 4: Again, it goes.
• 27:51
  Speaker 9: Into the into the territory of the unthinkable. But I
• 27:56
  Speaker 9: am pretty confident we will see quite a lot of
• 28:00
  Speaker 9: new regulatory and disclosure thinking around how we deal with this.
• 28:07
  Speaker 5: Christina, good yeav Thank you so much. This has been
• 28:10
  Speaker 5: a great start to the week.
• 28:12
  Speaker 4: Thank you. Thanks, You'll be back much, jem Bag.
• 28:24
  Speaker 5: Well, that's it for this episode of Stephanomics. We'll be
• 28:26
  Speaker 5: back next week. In the meantime, as ever, you can
• 28:29
  Speaker 5: get a lot more economic insight and news from the
• 28:32
  Speaker 5: Bloomberg Terminal website or app. This episode was produced by
• 28:36
  Speaker 5: Magnus Henrickson with help from Yang Yang and Summer Sadi.
• 28:40
  Speaker 5: The new executive producer of Stephanomics is Molly Smith and
• 28:44
  Speaker 5: the head of Bloomberg Podcasts is Sage Bowman.
• 29:02
  Speaker 9: Two desc