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

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.
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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