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Speaker 1: Hello, and welcome to another episode of The Oddlots Podcast.

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Speaker 1: I'm Tracy Alloway.

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Speaker 2: And I'm joll Why isn't thal Joe?

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Speaker 1: What do you know about the dark arts of asset

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Speaker 1: liability management?

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Speaker 2: Only things that have been told to us about it

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Speaker 2: on the Odd Lots. O.

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Speaker 1: Wait, that's actually quite a lot.

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Speaker 2: Yeah, No, that's true. It seems tough. Deposits can be flighty,

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Speaker 2: sometimes they can be stable. Sometimes when rates go up

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Speaker 2: they get passed on to deposits. Sometimes they don't deposit.

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Speaker 2: Beta's change over time, some things that. Yeah, that's about Okay,

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Speaker 2: that's about it.

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Speaker 1: No, that's pretty good. Podcast over, We're done, podcast over. No,

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Speaker 1: you're absolutely right about your characterization of deposits. And I

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Speaker 1: think one of the really interesting things about banking is

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Speaker 1: it is kind of built on this tension, which is

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Speaker 1: that in theory, you know, I can put my money

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Speaker 1: in a bank as a deposit, and then I am

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Speaker 1: theoretically entitled to pull it out at any time, And I,

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Speaker 1: for one, can't really imagine a business where like, at

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Speaker 1: any single point, I could see a majority of my

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Speaker 1: customers suddenly vanish. But it is also true in practice

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Speaker 1: that people who put their money in banks, they don't

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Speaker 1: tend to move it around that much. And that is

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Speaker 1: the thing, like the magic behavior that enables banks to

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Speaker 1: actually lend money or buy assets like bonds and things

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Speaker 1: like that.

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Speaker 2: Yeah, and you know, obviously part of the reason anyone

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Speaker 2: is having this conversation still is we all have we

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Speaker 2: remember this past March with SVB, but I recall at

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Speaker 2: the time and some of our episodes around them, thinking

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Speaker 2: about how I don't know if paradox is the word,

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Speaker 2: funny is the word, or weird it is that on

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Speaker 2: some bank deposits are extremely sticky and long duration, and

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Speaker 2: I think, you know, there's that stat maybe it's fake,

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Speaker 2: but you know, people are more likely to get divorced

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Speaker 2: than leave a bank, is one of those things that

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Speaker 2: people say. And if you have a customer, that's great.

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Speaker 2: On the other hand, sometimes the deposits do leave and

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Speaker 2: can leave in five seconds and it doesn't take very much.

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Speaker 2: So it always seemed to me that rather, I'm like,

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Speaker 2: I wonder our deposits do they exist on some continuum

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Speaker 2: of sticky to long duration or do they are Is

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Speaker 2: it more like Schrodinger's Schrodinger's deposits either they're there or

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Speaker 2: they're not there, but that there's no sort of in between.

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Speaker 3: Stay.

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Speaker 1: Yeah. We did that great episode with Joe Abat over

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Speaker 1: at Barclay's about bank deposits, and we've been joking on

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Speaker 1: the podcast since that in order to improve the transmission

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Speaker 1: of monetary policy, everyone needs to go out, do their

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Speaker 1: market research, find a high paying bank account somewhere and

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Speaker 1: actually move their money. And you know, I am joking,

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Speaker 1: but also kind not. There is an interaction between banks

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Speaker 1: and deposit rates and the effective transmission to monetary policy.

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Speaker 1: I mean, banks are supposed to be the primary mechanism

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Speaker 1: through which a lot of monetary policy is transmitted, and

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Speaker 1: so the question of how deposits are actually working, so

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Speaker 1: whether or not they're sticky, whether or not that stickiness

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Speaker 1: changes in an environment where rates are going up or down,

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Speaker 1: and also how those deposits sort of feed into monetary policy.

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Speaker 1: That is a really big topic and I think we

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Speaker 1: should do more on it totally. You know.

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Speaker 2: The thing that really strikes me, and this is in

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Speaker 2: a bank run is the perfect example of nonlinearity, right,

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Speaker 2: and so something is one state and then something is

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Speaker 2: suddenly a very different state. And we went from and

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Speaker 2: I think we've learned in recent times how tricky that

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Speaker 2: is to manage, and I think understanding the actual management

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Speaker 2: of that nonlinearity in practice something we can dive into further.

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Speaker 1: Right And I did call it the dark art of

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Speaker 1: asset liability management at the opening, and to some extent

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Speaker 1: it is kind of opaque, like no one gets a

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Speaker 1: lot of transparency into how an individual bank is actually

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Speaker 1: managing things like deposit and interest rate risk. So I'm

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Speaker 1: glad we can do this episode, and more than that,

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Speaker 1: we are really doing it with the perfect guest. We

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Speaker 1: have someone who's been on All Blots many times.

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Speaker 2: He's now climbing the rank really one, don't you think,

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Speaker 2: I mean of the moment must be he's up there.

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Speaker 1: Yeah, all right, So we're going to be speaking to

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Speaker 1: one of our perennial favorite guests, Josh Younger, formerly of

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Speaker 1: JP Morgan, now a senior advisor over at the Federal

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Speaker 1: Reserve Bank of New York. Josh, thank you for coming

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Speaker 1: back on All Blots for like the fifth sixth time.

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Speaker 3: I don't know, I've lost count, but it's great to

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Speaker 3: be back. I really appreciate the opportunities. It's great to

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Speaker 3: talk about.

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Speaker 1: This and I should just mention that we're recording this

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Speaker 1: on November ninth, and Josh, you have something to say

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Speaker 1: to our audience.

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Speaker 3: Yes, I almost memorized it, but we'll see. We'll see

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Speaker 3: if I get all the parts right. But these views

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Speaker 3: are my own, and those are my co authors from

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Speaker 3: the paper that we wrote, and they don't necessarily reflect

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Speaker 3: the views of the Federal Reserve System, the Federalser Bank

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Speaker 3: of New York, or the federalzer Bank of Dallas.

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Speaker 1: Oh yeah, I should mention that. I mean I kind

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Speaker 1: of figured that Josh would be an expert on this anyway.

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Speaker 1: But one of the reasons we wanted to talk to

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Speaker 1: him is because he did just publish a paper at

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Speaker 1: the Federal Reserve Bank of Dallas called Deposit Convexity, Monetary Policy,

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Speaker 1: and Financial Stability, and it gets into the nuts and

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Speaker 1: bolts of all the themes that Joe and I were

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Speaker 1: just discussing in the intro. So, speaking of the paper,

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Speaker 1: I mean, one of the things that you mentioned in

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Speaker 1: the research is that you and your authors have sort

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Speaker 1: of personal experience with the way banks actually deal with

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Speaker 1: interest rate risk. Can you talk to us a little

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Speaker 1: bit about how banks typically manage like, how are they

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Speaker 1: thinking about things like deposits and interest rate exposure.

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Speaker 3: Yeah, so it's very tempting. I mean, Joe you were

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Speaker 3: saying earlier. The deposits are there until they're not. And

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Speaker 3: but they're also an overnight demandable liability, meaning you can

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Speaker 3: get your money back whenever you want your money back,

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Speaker 3: and you tend not to. So it's a very behavioral process,

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Speaker 3: and so a lot of the work of managing the

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Speaker 3: interest rate risk of a bank is really understanding that

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Speaker 3: behavior because deposits are typically by far the largest source

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Speaker 3: of funding for most banks. Depending on the kind of

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Speaker 3: banking you're doing, you might have more or less of it,

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Speaker 3: but it's typically a huge chunk and it's not something

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Speaker 3: you can I mean, we made an attempt to write

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Speaker 3: it down on paper, but it's all based on the

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Speaker 3: premise that people tend to leave their money at banks

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Speaker 3: for long periods of time, even if that interest rate

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Speaker 3: is below what the broader market would consider risk free.

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Speaker 3: You know, there's lots of reasons for that. You certainly

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Speaker 3: need bank deposits to like, live your life, right, So

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Speaker 3: people usually call this convenience yield because you use bank

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Speaker 3: deposits for actual transactions as opposed to like money market

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Speaker 3: fund shares, which you don't. But if as a bank

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Speaker 3: you have one set of liabilities, you have to understand

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Speaker 3: and then on the asset side sometimes there's there's some complexity,

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Speaker 3: like mortgages are relatively complex. Lots of loans have embedded

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Speaker 3: quote unquote options, meaning the floors and caps and things

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Speaker 3: like that, but those are sort of easier to model

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Speaker 3: from first principles like financial math perspective, and so you

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Speaker 3: have a pretty good understanding of the interest rate risk

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Speaker 3: on the light on the asset side of the portfolio,

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Speaker 3: and a lot of the legwork is spent understanding the

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Speaker 3: liability side, specifically deposits.

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Speaker 2: In light of that. So Tracy mentioned we talked to

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Speaker 2: we did an episode with Joel Bote over at Barclays,

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Speaker 2: and that was just a few weeks before SVB, and

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Speaker 2: we didn't know there was no intention, But the question

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Speaker 2: then was, well, rate hikes have gone up or sorry,

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Speaker 2: rates have gone up. By then at that point, the

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Speaker 2: Fed had done a ton of hiking. And yet you know,

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Speaker 2: you look around and deposit rates are of the rates

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Speaker 2: that banks were paying out on people's deposits hadn't gone

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Speaker 2: up that more so we explored this idea of deposit

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Speaker 2: beta in your research, what is what can we say

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Speaker 2: in just based on your research about the nature of

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Speaker 2: how banks time the passing along of higher rates, So

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Speaker 2: it brings up kind of the mechanism which as we

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Speaker 2: talk about this beata, what does it represent?

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Speaker 3: Why does it move? Because there's a temptation to think

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Speaker 3: there's one big book of deposits and a giant lever

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Speaker 3: somewhere in the bank.

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Speaker 1: We should just say so beta is like the degree

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Speaker 1: to which these two things are moving.

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Speaker 3: Intent.

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Speaker 1: So benchmark interest rates going up, are rates paid out

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Speaker 1: on retail bank deposits or other types of bank deposits

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Speaker 1: actually going up.

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Speaker 3: Yeah. So if a quote unquote market yields the yield

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Speaker 3: you would get from money market fund for example, are

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Speaker 3: close to that goes up by one hundred basis points,

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Speaker 3: how much of that is represented in your deposit rate paid?

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Speaker 3: As a bank you think bank thinks about paying our

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Speaker 3: interest on deposits, so we call it rate paid, But

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Speaker 3: obviously the depositor is getting paid that interest. It's the

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Speaker 3: rate you earn. And a beta to a twenty five

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Speaker 3: percent would mean for ever one hundred basis points or

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Speaker 3: one percentage move in market yield twenty five basis points

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Speaker 3: or a quarter of a percentage point is actually reflected

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Speaker 3: in the deposit rate. So you know, the teendation is

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Speaker 3: to say, well, there's just this big book of deposits.

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Speaker 3: There's a giant dial somewhere in the bank, and you know,

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Speaker 3: you kind of move the dial less than the market

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Speaker 3: yield moved, and you do that to achieve some business outcome.

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Speaker 3: And there's sort of two things to think about with that.

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Speaker 3: The first is that the actual beta, the changes in

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Speaker 3: beta or the level of the beta, is to a

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Speaker 3: great extent the consequence of the deposit mix, meaning how

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Speaker 3: much of these things are in time deposit certificates of

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Speaker 3: deposit things with term exposure, and how much of that

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Speaker 3: is let's say zero interest checking And so as.

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Speaker 1: Demand deposits, they're called right where you can withdraw them

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Speaker 1: anytime when you want on demand.

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Speaker 3: Yeah, so you can say I want a demand deposit account.

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Speaker 3: I want to get my money whenever I want, or

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Speaker 3: you say I'll get my money in three months and

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Speaker 3: I want to earn a slightly higher rate of interest

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Speaker 3: for that. And typically those time deposits are priced at

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Speaker 3: some spread or difference to the market yield and demand

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Speaker 3: deposits typically a very low interest rate, and so as

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Speaker 3: customers move from demand deposits to time deposits, there's naturally

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Speaker 3: more reactivity just because they're terming out their deposits. So

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Speaker 3: that's one source of behavior. And then there is to

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Speaker 3: some extent a dial that reflects savings and checking account rates,

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Speaker 3: particularly on the institutional side, so the rate's paid to

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Speaker 3: corporations and investment managers and things like that, who tend

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Speaker 3: to be much more sensitive to these economic considerations. They

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Speaker 3: leave a lot more money on the table basically when

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Speaker 3: deposit rates are incrementally higher or lower. And in that case,

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Speaker 3: the question is do I want to grow my business

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Speaker 3: or shrink my business or keep it the same. So

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Speaker 3: there's kind of a debate when you're talking about a beta.

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Speaker 3: Are you talking about the market neutral beta meaning my

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Speaker 3: market share to say is constant? Are you talking about

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Speaker 3: the beta re car to grow my business? You're talking

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Speaker 3: about betaver card to shrink my business. There's been a

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Speaker 3: lot of discussion about how size can sometimes be more expensive,

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Speaker 3: not more profitable, and so you might want to shrink

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Speaker 3: a business for example. And so when we think about

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Speaker 3: topics around interest rate risk management. I always like to

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Speaker 3: think in terms of the sort of market neutral beta,

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Speaker 3: which is what is the market beta I need to

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Speaker 3: pay to keep all the deposits I currently have, or

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Speaker 3: at least my share of the deposits in the system,

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Speaker 3: because that's more reflective of like the actual underlying interest

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Speaker 3: rate risk of deposit liabilities as opposed to the business

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Speaker 3: management and planning decisions of an individual institution.

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Speaker 1: Getting back to the idea that you know, in theory,

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Speaker 1: people can pull their money out of banks whenever they want,

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Speaker 1: unless they're in something like a certificate of deposit. But

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Speaker 1: in practice they tend not to. And I remember this

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Speaker 1: is something we spoke to Abata about, Like there are

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Speaker 1: a lot of people who have an account at a

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Speaker 1: specific bank because they're getting something else out of it.

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Speaker 1: You know, there's a relationship there, a business relationship, they

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Speaker 1: know each other, maybe they're getting a loan, a business

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Speaker 1: loan or something like that. How sticky are deposits in practice?

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Speaker 1: And does it vary by you know, deposit type beyond

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Speaker 1: whether it's a demand deposit versus a termed out depositive.

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Speaker 3: Yeah, the type of depositor is really important. And so

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Speaker 3: you know, maybe taking a big step back. So think

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Speaker 3: about the system as a whole. Why do we think

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Speaker 3: deposits are long lived? If you go back to the

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Speaker 3: state banking here of the eighteen thirties and go all

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Speaker 3: the way to today, for most of that period, deposit

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Speaker 3: balances are growing at or faster than gross domestic product,

245
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Speaker 3: which tells you that the deposits in the system as

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Speaker 3: a system are there for the most part. Now there

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Speaker 3: are more outlets now than there were back then. To

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Speaker 3: leave the banking system, go to see money market fund

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Speaker 3: There certainly weren't money market funds in the eighteen fifties.

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Speaker 3: But like generally speaking, deposits tend to grow with or

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Speaker 3: faster and GDP. So even if you take your deposit

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Speaker 3: out of one bank, you're probably putting it at another bank.

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Speaker 3: So deposits in the system are very long lived. But

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Speaker 3: then there's a question of the type of depositor and

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Speaker 3: so on the one hand, of what we call retail depositors,

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Speaker 3: I'm just using liquidity coverage ratio terminology. This is what

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Speaker 3: the regulators have used to establish different types of deposits.

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Speaker 3: So there's a common language for this now. Retail or

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Speaker 3: stable retail deposits are you know, individuals, like people at

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Speaker 3: this table, we tend to be relatively insensitive to rates

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Speaker 3: on the whole because we use our deposits for for

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Speaker 3: the most part, for lots of stuff. So we go

263
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Speaker 3: buy coffee with it, and we go to the movies

264
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Speaker 3: or whatever, like you pay your pay your gas bill.

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Speaker 3: Even if it's direct deposit from your bank account, it's

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Speaker 3: still from a bank account. It's not from a money

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Speaker 3: market fund. And so you know, the convenience yield, so

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Speaker 3: to speak, of having bank deposits is relatively high. And

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Speaker 3: even if most people don't keep a lot of money

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Speaker 3: at the bank, there are a lot of people and

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Speaker 3: so that adds up to a big deposit base. So

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Speaker 3: most of the useful money in the economy is in

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Speaker 3: posit format used by individuals. And then if you go

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Speaker 3: so that, we call that a low beta deposit or

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Speaker 3: a sticky deposit. And that's again a statement about the

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Speaker 3: rate paid, not necessarily the propensity for that deposit to

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Speaker 3: leave the bank. We can talk about that separately, but

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Speaker 3: this is assuming I pay whatever rate is necessary to

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Speaker 3: keep that deposit. So that's a relatively low beta, low

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Speaker 3: rate deposit. Not much reactivity to market yield. And then

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Speaker 3: if you go into what the regulations term the wholesale space,

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Speaker 3: wholesale deposit space, which is really institutions, asset managers who

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Speaker 3: have excess cash, corporations who have excess cash. They kind

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Speaker 3: of split it into two buckets. One is what it's

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Speaker 3: called operational deposits. Operational are used to meet payroll and

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Speaker 3: various expenses. If you import export, you have to pay

287
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Speaker 3: somebody with that deposit, and so those still need to

288
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Speaker 3: be in the banking system somewhere. Now you can move

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Speaker 3: them around between banks, but the rate paid on those

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Speaker 3: tends to be a little lower than market yields, for example,

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Speaker 3: just because they still need to be a bank deposit

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Speaker 3: at the s end of the day, so there's still

293
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Speaker 3: a convenience yield, so to speak, to have that. And

294
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Speaker 3: then at the high beta end of the spectrum, you

295
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Speaker 3: have non operational deposits, which is excess cash that's being

296
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Speaker 3: left in a deposit account for or reasons on known

297
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Speaker 3: it could easily go to a money market fund. It's

298
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Speaker 3: money that corporations don't need to meet regular payroll and expenses,

299
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Speaker 3: and so they're kind of keeping it because it's convenient

300
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Speaker 3: to have some excess savings just in case maybe or

301
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Speaker 3: something like that, but it's not being used on a

302
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Speaker 3: daily basis, So in principle it could be in anything.

303
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Speaker 3: It's more of an investment in deposit accounts. So to

304
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Speaker 3: keep those funds you need to pay a relatively high

305
00:15:36,080 --> 00:15:38,920
Speaker 3: data pretty close to one because otherwise they'll just go

306
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Speaker 3: somewhere else or to a money market fund.

307
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Speaker 2: What happens when the FED embarks on and we've had

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Speaker 2: we had this hiking cycle. Maybe it's over pass hiking cycles.

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Speaker 2: What is your research show really happens to deposit betas

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Speaker 2: over time as a hiking cycle picks up.

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Speaker 3: Yeah, So here we're thinking about the consolidated beta of

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Speaker 3: the whole institutions. This is if you take whatever fraction

313
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Speaker 3: you have in retail, wholesale, operational, wholesale, non operational, and

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Speaker 3: even wholesale funding and term funding. You just think of

315
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Speaker 3: the funding rate the bank has to pay to fund itself.

316
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Speaker 3: That beta, just the ratio of that rate to the

317
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Speaker 3: risk free overnight rate tends to increase as interest rates rise.

318
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Speaker 3: So this is related to the propensity of corporations in particular,

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Speaker 3: but also individuals to move their excess savings into money

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Speaker 3: market funds when interest rates are above zero and the

321
00:16:27,880 --> 00:16:31,680
Speaker 3: opportunity cost of keeping them in a bank increases. That's

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Speaker 3: not true for everybody, but on average and over the

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Speaker 3: long sweep of history, it's tended to be the case

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Speaker 3: that the beta goes up when rates go up.

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Speaker 1: Wait, so this is different to how people normally think

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Speaker 1: of the way bank deposit rates work, which is people

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Speaker 1: tend to think of them as like a linear thing,

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Speaker 1: like rates go up one hundred basis points, and then

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Speaker 1: deposits will go up one hundred basis points. Maybe not

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Speaker 1: one hundred exactly for obvious reasons that we've discovered on

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Speaker 1: the podcast, but by yeah, but by like a set

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Speaker 1: amount each time. But you're kind of arguing that actually

333
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Speaker 1: it's a non linear relationship and as interest rates go up,

334
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Speaker 1: the beta the relationship actually gets stronger.

335
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Speaker 3: Yeah, exactly. So, like linear means is static beta. Static

336
00:17:15,400 --> 00:17:17,840
Speaker 3: beta means twenty five percent of every interest rate increase

337
00:17:17,880 --> 00:17:20,720
Speaker 3: goes through to deposits, for example. And so if that

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Speaker 3: beta increases, non linear relationship starts turning up and getting

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Speaker 3: some convexity to it, and that means that the last

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Speaker 3: hundred basis points are not the same as the first

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Speaker 3: hundred basis points, for example, from the depositors perspective.

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Speaker 1: So on that note, you mentioned money market funds. Just

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Speaker 1: then like how much of this dynamic is driven by

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Speaker 1: competition with money market funds, Because if I think about

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Speaker 1: like things that have changed in the financial system, it

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Speaker 1: feels like MMFs are a bigger presence, although maybe they're

347
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Speaker 1: not compared to two thousand and eight, I can't remember

348
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Speaker 1: the numbers, but it feels like nowadays there is this

349
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Speaker 1: range of options for where you want to put your

350
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Speaker 1: excess cash, and we have seen in flows to money

351
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Speaker 1: market funds pick up. We have seen that play a

352
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Speaker 1: role in things like SVB and silver Gate obviously or sorry, arguably.

353
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Speaker 1: So I'm just wondering, like, how do banks compete with

354
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Speaker 1: MMFs and how does that feed into that non linear

355
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Speaker 1: relationship that you just describe.

356
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Speaker 3: So they're competing primarily with each other. I would argue,

357
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Speaker 3: like a bank has expenses that a money market fund

358
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Speaker 3: does not, namely capital and liquidity, and so you know,

359
00:18:25,480 --> 00:18:28,679
Speaker 3: money market funds are essentially a pass through instrument, and

360
00:18:28,760 --> 00:18:33,360
Speaker 3: so they don't have branches, they don't have payment processing services,

361
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Speaker 3: they don't have all of the overheaded bank deals with

362
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Speaker 3: so it's kind of a it's number to think that

363
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Speaker 3: a bank could quote unquote compete with the money f

364
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Speaker 3: I'm purely on the yield that they offer because it's

365
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Speaker 3: a very different business.

366
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Speaker 1: Right, But this is what I mean, Like, banks are

367
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Speaker 1: always going to have expenses, so they're always going to

368
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Speaker 1: have to pay out less than a money market fund,

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Speaker 1: Like they won't be able to pass on that full

370
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Speaker 1: interest rate hike.

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Speaker 3: Right generally speaking, yes, and now they can compete with

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Speaker 3: each other, and they could try to source deposits that

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Speaker 3: have they're associated with profitable activities. So we haven't really

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Speaker 3: talked about what you're using these deposits for. If using

375
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Speaker 3: them to just hold excess cash, it's probably less attractive.

376
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Speaker 3: If you have businesses like wealth management and market making

377
00:19:09,080 --> 00:19:12,879
Speaker 3: trading that generate non interest revenue, it might be more interesting,

378
00:19:12,960 --> 00:19:14,800
Speaker 3: but you have to have something to do with the funding.

379
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Speaker 3: But and that's why in some cases banks we're very

380
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Speaker 3: happy to see these deposits roll off. And when you

381
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Speaker 3: have non operational deposits supporting cash holdings, there's not much

382
00:19:25,560 --> 00:19:28,520
Speaker 3: spread in that you still have all of the expenses,

383
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Speaker 3: so you have a relatively high interest deposit funding to

384
00:19:32,280 --> 00:19:37,200
Speaker 3: support non spread earning cash assets, and like that's really

385
00:19:37,240 --> 00:19:38,760
Speaker 3: not what they're in the business of doing. And so

386
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Speaker 3: under those circumstances, higher rates and money market fund runoff

387
00:19:42,880 --> 00:19:47,160
Speaker 3: to money market funds is like reasonably fine. But then again,

388
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Speaker 3: if you have you know, again, very profitable businesses that

389
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Speaker 3: need funding, you want to you want to bid to

390
00:19:52,080 --> 00:19:54,720
Speaker 3: retain that funding, because otherwise you have to shrink the business.

391
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Speaker 3: And so I would think of this as more of

392
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Speaker 3: to some extent, commuting with money funds, but also banks

393
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Speaker 3: competing with each other for those marginal deposits that support

394
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Speaker 3: profitable activity.

395
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Speaker 1: Joe, do you remember, I think it must have been

396
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Speaker 1: just a couple of years ago when banks were complaining

397
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Speaker 1: about access deposits.

398
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Speaker 2: Absolutely for one thing. Yeah, absolutely, and it was it

399
00:20:11,440 --> 00:20:14,119
Speaker 2: was always sort of. It took me actually many odd

400
00:20:14,320 --> 00:20:18,159
Speaker 2: Loots episodes to even understand the coherence of that statement.

401
00:20:18,560 --> 00:20:22,080
Speaker 2: Now in November twenty twenty three, I can understand why

402
00:20:22,119 --> 00:20:25,879
Speaker 2: having too many deposits would be a problem, but it

403
00:20:25,920 --> 00:20:29,240
Speaker 2: took me a while to wrap my head around that concept. Obviously,

404
00:20:29,280 --> 00:20:31,280
Speaker 2: in the case of SVB was kind of you know,

405
00:20:32,200 --> 00:20:34,760
Speaker 2: that one was very straightforward, because there were not many

406
00:20:34,880 --> 00:20:38,280
Speaker 2: natural things they could do on the asset side of

407
00:20:38,320 --> 00:20:40,959
Speaker 2: the business with all of that VC cash that they

408
00:20:40,960 --> 00:20:42,520
Speaker 2: were getting in and so for they were in a

409
00:20:42,520 --> 00:20:47,000
Speaker 2: traditional lending bank. But that actually segs to my next question,

410
00:20:47,119 --> 00:20:50,520
Speaker 2: which is in the time of moving rates, when rates

411
00:20:50,520 --> 00:20:53,600
Speaker 2: are stable whatever its banking doesn't seem that hard. But

412
00:20:53,680 --> 00:20:56,680
Speaker 2: in a time of when rates are on the move,

413
00:20:57,000 --> 00:20:59,359
Speaker 2: and as you mentioned, say the market neutral beta is

414
00:20:59,440 --> 00:21:02,000
Speaker 2: such a that you know, banks want to keep their

415
00:21:02,040 --> 00:21:06,080
Speaker 2: business the way it is. Move around the deposit, move

416
00:21:06,119 --> 00:21:09,159
Speaker 2: around the rate, to hold on to your deposits. Moving

417
00:21:09,200 --> 00:21:13,000
Speaker 2: around the assets does not seem very easy, and they're

418
00:21:13,280 --> 00:21:16,320
Speaker 2: liquid and in many cases are long dating. Talk to

419
00:21:16,400 --> 00:21:20,119
Speaker 2: us about, you know, as the deposit mixed changes or

420
00:21:20,160 --> 00:21:22,320
Speaker 2: they have to pay out, what kind of strain that

421
00:21:22,359 --> 00:21:24,760
Speaker 2: pay places on the asset side for the banks.

422
00:21:24,840 --> 00:21:26,320
Speaker 3: Yeah, well, I think the key is that the bank

423
00:21:26,359 --> 00:21:30,240
Speaker 3: is exposed to interstrate risk from these deposits. So as earlier,

424
00:21:30,280 --> 00:21:33,080
Speaker 3: the question is, how can you have long term interest

425
00:21:33,160 --> 00:21:36,240
Speaker 3: rate risk from overnight demandable liabilities demand deposits. I can

426
00:21:36,240 --> 00:21:39,000
Speaker 3: get my money back any time. This is an overnight liability, right,

427
00:21:39,400 --> 00:21:40,959
Speaker 3: And the answer is if people keep their money there

428
00:21:40,960 --> 00:21:44,800
Speaker 3: for a long time. That beta below one, meaning not

429
00:21:44,840 --> 00:21:48,240
Speaker 3: all of those interest rate increases get passed through, generates

430
00:21:48,280 --> 00:21:51,440
Speaker 3: a ton of interest rate risk for that kind of liability.

431
00:21:51,440 --> 00:21:53,439
Speaker 3: And you can think of it by splitting it up

432
00:21:53,480 --> 00:21:56,360
Speaker 3: into what we know we call replicating portfolio. What's equivalent

433
00:21:56,400 --> 00:21:59,960
Speaker 3: to a fifty percent beta deposit liability. It's fifty dollars

434
00:22:00,160 --> 00:22:04,840
Speaker 3: worth of Fed Funds linked floaters perfectly floating rate liabilities,

435
00:22:05,160 --> 00:22:08,000
Speaker 3: and fifty dollars worth of zero coupon debt. Right that

436
00:22:08,080 --> 00:22:10,800
Speaker 3: generates an interest rate expense that's fifty percent of the

437
00:22:11,400 --> 00:22:14,800
Speaker 3: Fed Funds rate or the overnight funding rate. And so

438
00:22:15,040 --> 00:22:17,000
Speaker 3: if you think about it in those terms, if I

439
00:22:17,000 --> 00:22:19,520
Speaker 3: give you fifty dollars worth of zero coupon funding, you

440
00:22:19,560 --> 00:22:21,080
Speaker 3: would say, well, that's going to be worth a lot

441
00:22:21,119 --> 00:22:23,280
Speaker 3: more when rates are higher than lower. So if I

442
00:22:23,320 --> 00:22:25,320
Speaker 3: make money when rates go up and I lose money

443
00:22:25,320 --> 00:22:27,400
Speaker 3: when rates go down, well that sounds a whole lot

444
00:22:27,440 --> 00:22:30,800
Speaker 3: like short duration. And so that's why deposits as a

445
00:22:30,840 --> 00:22:34,080
Speaker 3: general matter have duration risk associated with them. And that

446
00:22:34,160 --> 00:22:37,720
Speaker 3: duration risk is tied to the beta, not necessarily the runoff,

447
00:22:37,720 --> 00:22:40,840
Speaker 3: although that's important as well, even without even if you're

448
00:22:40,840 --> 00:22:44,920
Speaker 3: realizing exactly the expected runoff that you would anticipate given

449
00:22:44,960 --> 00:22:46,640
Speaker 3: the level of rates and all the things we described.

450
00:22:46,760 --> 00:22:49,119
Speaker 3: Or if you have a static balance, even as that

451
00:22:49,160 --> 00:22:52,800
Speaker 3: beta moves around, your interest rate risk changes. And so

452
00:22:53,440 --> 00:22:57,520
Speaker 3: the job of a bank alm department is to try

453
00:22:57,520 --> 00:23:01,280
Speaker 3: to anticipate, on the one hand, that behavior and on

454
00:23:01,320 --> 00:23:04,040
Speaker 3: the other the mix of assets that satisfies all the

455
00:23:04,080 --> 00:23:11,000
Speaker 3: other criteria and mitigates the risks associated with the interest

456
00:23:11,080 --> 00:23:14,040
Speaker 3: rate exposure of the deposits on the liability sides. You

457
00:23:14,040 --> 00:23:15,879
Speaker 3: have to pick the right assets, and to do that

458
00:23:15,880 --> 00:23:18,640
Speaker 3: you really have to understand your deposits. And so part

459
00:23:18,640 --> 00:23:20,280
Speaker 3: of the point we're making in the paper is that

460
00:23:21,280 --> 00:23:23,800
Speaker 3: the fact that the BEATA is variable, while not particularly

461
00:23:23,840 --> 00:23:26,240
Speaker 3: controversial people have kind of known this intuitively for a

462
00:23:26,280 --> 00:23:29,879
Speaker 3: long time, has important consequences for what happens on the

463
00:23:29,920 --> 00:23:32,800
Speaker 3: asset side of the balance sheet, especially when rates go

464
00:23:32,880 --> 00:23:33,399
Speaker 3: up quickly.

465
00:23:33,520 --> 00:23:38,480
Speaker 2: When you say important consequences on the asset side, expand

466
00:23:38,480 --> 00:23:39,120
Speaker 2: on that a little bit.

467
00:23:39,200 --> 00:23:42,280
Speaker 3: Yeah, So the bank is subject generally speaking to risk controls.

468
00:23:42,560 --> 00:23:44,320
Speaker 3: So you can't just take all the risks you want.

469
00:23:45,000 --> 00:23:47,560
Speaker 3: There are risk limits on the duration of your equity.

470
00:23:47,680 --> 00:23:50,760
Speaker 3: There's a rule called the economic value sensitivity rule. That's

471
00:23:50,760 --> 00:23:54,280
Speaker 3: a basal requirement that looks at the sort of fair

472
00:23:54,359 --> 00:23:58,520
Speaker 3: value sensitivity the entire balance sheet under interest rate changes.

473
00:23:58,640 --> 00:24:01,760
Speaker 3: And so the key is that that generally speaking, banks

474
00:24:01,760 --> 00:24:03,920
Speaker 3: have to hedge their interest rate risk. Now they can

475
00:24:04,200 --> 00:24:06,360
Speaker 3: take positions relative to it to some extent, but they are,

476
00:24:06,520 --> 00:24:09,760
Speaker 3: due to regulatory risk management requirements, going to hedge most

477
00:24:09,800 --> 00:24:14,080
Speaker 3: of it. And so when beta's change relative to expectations,

478
00:24:14,560 --> 00:24:16,200
Speaker 3: you have to do something on the asset side of

479
00:24:16,200 --> 00:24:18,960
Speaker 3: the portfolio to adjust for it. And it's important to

480
00:24:19,000 --> 00:24:21,159
Speaker 3: bear in mind that. And we'll talk about you know,

481
00:24:21,200 --> 00:24:24,600
Speaker 3: policy transmissions through like bank lending channel type things which

482
00:24:24,600 --> 00:24:25,320
Speaker 3: we have in the paper.

483
00:24:26,240 --> 00:24:26,760
Speaker 1: But the.

484
00:24:28,720 --> 00:24:30,960
Speaker 3: Securities holdings of a bank, the treasuries they buy, the

485
00:24:30,960 --> 00:24:33,480
Speaker 3: mortgage backed securities they buy, are not the only source

486
00:24:33,520 --> 00:24:35,320
Speaker 3: of duration. When they make a mortgage and keep it

487
00:24:35,359 --> 00:24:37,080
Speaker 3: as a loan, or when they make a long term

488
00:24:37,080 --> 00:24:39,840
Speaker 3: loan to a corporation, that's also interest rate.

489
00:24:39,840 --> 00:24:42,919
Speaker 1: Risk, right, which is also moving around when rates are going.

490
00:24:42,880 --> 00:24:46,160
Speaker 3: Up exactly yea. So banks have a lot of negative convexity.

491
00:24:46,240 --> 00:24:50,800
Speaker 3: Negative convexity means that as rates go up, the exposure

492
00:24:50,800 --> 00:24:54,720
Speaker 3: of the bank increases to that risk. So when rates

493
00:24:54,720 --> 00:24:57,560
Speaker 3: go higher, they get longer duration, when rates go lower,

494
00:24:57,600 --> 00:24:59,560
Speaker 3: they get shorter duration. This is just like being short

495
00:24:59,560 --> 00:25:02,200
Speaker 3: an option, and so banks have options through a variety

496
00:25:02,200 --> 00:25:05,600
Speaker 3: of channels. On the asset side, that's through the mortgages

497
00:25:05,640 --> 00:25:07,960
Speaker 3: and other things, and on the liability side, which is

498
00:25:08,000 --> 00:25:10,280
Speaker 3: a huge chunk of it. Probably coequal, if not larger,

499
00:25:10,320 --> 00:25:15,400
Speaker 3: source of negative convexity is the sensitivity of those deposits

500
00:25:16,280 --> 00:25:18,200
Speaker 3: and the beta, in particular to interest rates.

501
00:25:18,480 --> 00:25:21,560
Speaker 1: Wit could I just ask on this topic the relationship

502
00:25:21,560 --> 00:25:24,640
Speaker 1: between the deposit mix and the assets that a bank

503
00:25:24,720 --> 00:25:29,359
Speaker 1: is actually investing in. Do in practice, does like a

504
00:25:29,400 --> 00:25:32,960
Speaker 1: treasurer at a bank talk to the risk manager or

505
00:25:33,000 --> 00:25:36,000
Speaker 1: whoever's in charge of the deposit mix, because I imagine

506
00:25:36,000 --> 00:25:38,879
Speaker 1: a treasurer is just I always had it in my

507
00:25:38,960 --> 00:25:41,119
Speaker 1: head as like someone sat there and they have like

508
00:25:41,440 --> 00:25:44,879
Speaker 1: X million or billions of dollars to play around with

509
00:25:45,080 --> 00:25:47,400
Speaker 1: and they can kind of, you know, within a certain framework,

510
00:25:47,480 --> 00:25:49,640
Speaker 1: do what they want with it. But do you think

511
00:25:49,640 --> 00:25:52,560
Speaker 1: they would actually consider like, oh, actually, this is what

512
00:25:52,600 --> 00:25:55,439
Speaker 1: my deposit mix looks like. Here's a rough estimate of

513
00:25:55,480 --> 00:25:58,520
Speaker 1: my duration. How much of this is sticky? And isn't

514
00:25:58,560 --> 00:26:01,600
Speaker 1: and this is going to limit or shape my asset

515
00:26:01,680 --> 00:26:02,879
Speaker 1: or my lending decisions.

516
00:26:03,080 --> 00:26:04,439
Speaker 3: Well, that comes to the risk limits. So I can

517
00:26:04,480 --> 00:26:07,640
Speaker 3: always speak in generality. Yeah, but when the industry is subject,

518
00:26:07,760 --> 00:26:10,240
Speaker 3: when each institution has to satisfy risk limits, that means

519
00:26:10,280 --> 00:26:12,400
Speaker 3: they can't take all the risks that they want. Now,

520
00:26:12,440 --> 00:26:16,000
Speaker 3: where those particular things live within the institution, I can't

521
00:26:16,040 --> 00:26:19,200
Speaker 3: really say, But as a general matter, like if your

522
00:26:19,240 --> 00:26:24,160
Speaker 3: deposits are losing duration or gaining duration, that affects all

523
00:26:24,160 --> 00:26:26,400
Speaker 3: of the other activities that you're taking, which can contribute

524
00:26:26,440 --> 00:26:28,680
Speaker 3: or detract from the duration of the asset side. Because

525
00:26:28,720 --> 00:26:30,760
Speaker 3: it's all about the collect it's all about the consolidated

526
00:26:30,800 --> 00:26:33,920
Speaker 3: exposure of the whole balance sheet. Because you think about

527
00:26:33,960 --> 00:26:38,520
Speaker 3: it as one giant interest rate exposure for the entire institution.

528
00:26:38,760 --> 00:26:40,800
Speaker 3: You roll it all up, all those lines of business,

529
00:26:40,880 --> 00:26:43,479
Speaker 3: all the lending businesses, all the deposit taking businesses. At

530
00:26:43,480 --> 00:26:45,359
Speaker 3: the end of the day, you have one number, and

531
00:26:45,400 --> 00:26:47,399
Speaker 3: that number has to be held within limits. That number

532
00:26:47,440 --> 00:26:51,760
Speaker 3: is how many dollars you gain or lose when rates

533
00:26:51,800 --> 00:26:53,919
Speaker 3: go up or down. And that's the thing. And you

534
00:26:53,920 --> 00:26:56,879
Speaker 3: can compare that to the equity of the institution. You

535
00:26:56,920 --> 00:26:59,800
Speaker 3: can compare that to the overall risk of the institution,

536
00:27:00,000 --> 00:27:01,680
Speaker 3: and you can compare that to a bunch of different things,

537
00:27:01,680 --> 00:27:04,960
Speaker 3: and there's all kinds of nuance underlying that, but generally

538
00:27:05,000 --> 00:27:08,040
Speaker 3: speaking that the whole balance sheet has to be structured

539
00:27:08,080 --> 00:27:11,040
Speaker 3: such that it does not have too much exposure in

540
00:27:11,160 --> 00:27:13,480
Speaker 3: aggregate to change his interest rates.

541
00:27:31,520 --> 00:27:34,239
Speaker 2: So I noticed reading your paper that one of the

542
00:27:34,280 --> 00:27:38,840
Speaker 2: authors you cite regularly was actually a recent guest on

543
00:27:38,920 --> 00:27:42,560
Speaker 2: the show Itamar Directxler, and we talked about the fact that,

544
00:27:44,200 --> 00:27:46,119
Speaker 2: you know, we talked about sort of this in the

545
00:27:46,160 --> 00:27:49,320
Speaker 2: context of the nineteen seventies and the impairment of monetary

546
00:27:49,400 --> 00:27:53,399
Speaker 2: policy back then do to it's sorry different, but the

547
00:27:53,520 --> 00:27:56,920
Speaker 2: nature of deposits and deposits moving out in that curtailing

548
00:27:57,000 --> 00:27:59,399
Speaker 2: lending and so forth. But talk to us, what are

549
00:27:59,440 --> 00:28:02,159
Speaker 2: the consequence is from your research and maybe bring it

550
00:28:02,200 --> 00:28:04,360
Speaker 2: forward to today when you think about and people try

551
00:28:04,400 --> 00:28:08,800
Speaker 2: to understand the transmission of monetary policy, which as Tracy

552
00:28:08,840 --> 00:28:12,199
Speaker 2: mentioned earlier, in many ways goes through the banking system,

553
00:28:12,280 --> 00:28:14,399
Speaker 2: like kind of have to what does some of your

554
00:28:14,440 --> 00:28:15,439
Speaker 2: research imply for that?

555
00:28:16,040 --> 00:28:17,560
Speaker 3: So a lot of our work is built off of

556
00:28:17,600 --> 00:28:21,960
Speaker 3: what they've done and they basically make the argument that

557
00:28:22,480 --> 00:28:24,760
Speaker 3: the fact that the beta is less than one means

558
00:28:24,760 --> 00:28:30,160
Speaker 3: the deposit franchise has value, meaning your funding advantage from

559
00:28:30,200 --> 00:28:32,840
Speaker 3: deposits that cost you less than the risk free rate

560
00:28:32,960 --> 00:28:36,680
Speaker 3: to support is worth more when rates are higher and

561
00:28:36,760 --> 00:28:39,200
Speaker 3: less when rates are lower. Whenever you make money when

562
00:28:39,240 --> 00:28:41,160
Speaker 3: rates move around. That's interest rate risk, and so the

563
00:28:41,200 --> 00:28:44,960
Speaker 3: deposit franchise generates short duration risk, which again just means

564
00:28:44,960 --> 00:28:47,040
Speaker 3: you make money when rates go up, and so that

565
00:28:47,120 --> 00:28:50,320
Speaker 3: balance is the long duration exposure. On the asset side

566
00:28:50,320 --> 00:28:53,479
Speaker 3: of the portfolio. You can think of this somewhat differently

567
00:28:53,520 --> 00:28:55,480
Speaker 3: and say the value of the bank is related to

568
00:28:55,480 --> 00:28:57,720
Speaker 3: its funding cost. If its funding cost is lower, its

569
00:28:57,760 --> 00:29:01,000
Speaker 3: value is higher. And so the rightquote unquote discount rate

570
00:29:01,040 --> 00:29:03,600
Speaker 3: to apply to the assets of a bank is its

571
00:29:03,640 --> 00:29:06,640
Speaker 3: funding curve, not necessarily sort of the risk free rate.

572
00:29:06,680 --> 00:29:09,960
Speaker 3: In general, it's an equivalent statement. So we're just adjusting

573
00:29:10,000 --> 00:29:13,440
Speaker 3: what they're saying and arguing that if the beta is variable,

574
00:29:14,440 --> 00:29:17,760
Speaker 3: their beta is generally static, because they're making a pedagogical

575
00:29:17,800 --> 00:29:20,480
Speaker 3: point about how interest rate risk is generated in a

576
00:29:20,480 --> 00:29:25,360
Speaker 3: bank portfolio, and we're just saying that variability, that convexity

577
00:29:25,920 --> 00:29:28,440
Speaker 3: can affect the decisions that banks make in a way

578
00:29:28,480 --> 00:29:31,720
Speaker 3: that matters for a variety of participants in the market.

579
00:29:31,760 --> 00:29:35,720
Speaker 3: So you mentioned monetary policy transmission. So the academic literature

580
00:29:35,760 --> 00:29:37,960
Speaker 3: talks about the bank lending channel. The original version of

581
00:29:37,960 --> 00:29:41,200
Speaker 3: the bank lending channel is more related to reserve requirements

582
00:29:41,240 --> 00:29:45,680
Speaker 3: and the creation destruction reserves to facilitate monetary policy setting,

583
00:29:45,720 --> 00:29:48,120
Speaker 3: and therefore that has an impact on not just the

584
00:29:48,160 --> 00:29:51,600
Speaker 3: pricing of lending, but the quantity of lending. That's the

585
00:29:51,680 --> 00:29:55,320
Speaker 3: key is banks can make fewer loans as a consequence

586
00:29:55,360 --> 00:29:58,040
Speaker 3: of certain monetary policy decisions, or more loans is the

587
00:29:58,040 --> 00:30:02,600
Speaker 3: consequence of certain policies decisions. And so Dreshler and his

588
00:30:02,720 --> 00:30:05,640
Speaker 3: collaborators make an argument that deposit rates are a secondary

589
00:30:05,720 --> 00:30:08,920
Speaker 3: channel for this, or now that there are no reserve requirements,

590
00:30:09,240 --> 00:30:11,840
Speaker 3: a primary channel for this, where if the deposit rate

591
00:30:11,880 --> 00:30:15,040
Speaker 3: goes up, you're expected funding costs for certain loans goes up.

592
00:30:15,080 --> 00:30:18,120
Speaker 3: That gets fed through into pricing and quantities, and therefore

593
00:30:18,720 --> 00:30:21,520
Speaker 3: you know there's a channel through which policy rate decisions

594
00:30:21,520 --> 00:30:25,680
Speaker 3: can affect bank credit allocation decisions. In our argument in

595
00:30:25,680 --> 00:30:31,440
Speaker 3: this paper is one the convex the nonlinearity of deposit

596
00:30:31,520 --> 00:30:36,320
Speaker 3: rates amplifies that channel to some extent, just because the

597
00:30:36,440 --> 00:30:40,080
Speaker 3: change in expected funding costs for a given loan is

598
00:30:40,160 --> 00:30:42,160
Speaker 3: higher if you think betas are going up when rates

599
00:30:42,200 --> 00:30:45,360
Speaker 3: are going up. And the secondary effect is that if

600
00:30:45,360 --> 00:30:49,360
Speaker 3: the bank is losing capacity to support duration in its lending,

601
00:30:49,360 --> 00:30:51,240
Speaker 3: which is another way to say this, if the deposits

602
00:30:51,240 --> 00:30:54,240
Speaker 3: are getting shorter, that means the assets have to get shorter,

603
00:30:54,680 --> 00:30:56,680
Speaker 3: and that means there's less space to make long term

604
00:30:56,720 --> 00:31:01,280
Speaker 3: fixed rate loans, and so mortgages, for example, are long

605
00:31:01,360 --> 00:31:04,720
Speaker 3: term and fixed rate. Some commercial term lending is long

606
00:31:04,800 --> 00:31:07,040
Speaker 3: term and fixed rate. You know, a ten year loan.

607
00:31:07,160 --> 00:31:10,040
Speaker 3: Commercial real estate lending is sometimes long term fixed rate,

608
00:31:10,080 --> 00:31:12,120
Speaker 3: and so you know that in addition to all the

609
00:31:12,160 --> 00:31:15,640
Speaker 3: securities holdings that they have are all sources of duration exposure.

610
00:31:15,640 --> 00:31:18,640
Speaker 3: And so when deposits get shorter, the ability to make

611
00:31:18,720 --> 00:31:21,880
Speaker 3: long term asset to generate long term assets included within

612
00:31:21,960 --> 00:31:25,520
Speaker 3: that long term fixed rate loans is simply lesser as

613
00:31:25,560 --> 00:31:26,320
Speaker 3: a general.

614
00:31:26,040 --> 00:31:30,800
Speaker 1: Matter, if deposits are getting shorter in a rising rate environment,

615
00:31:30,880 --> 00:31:36,320
Speaker 1: like how does that interact with the macroeconomic outlook as well?

616
00:31:36,360 --> 00:31:39,080
Speaker 1: Because I take the point about you know, funding costs

617
00:31:39,080 --> 00:31:41,760
Speaker 1: and things like that, but Also, if interest rates are

618
00:31:41,800 --> 00:31:47,240
Speaker 1: going up, it's probably because the economy is doing relatively well,

619
00:31:47,320 --> 00:31:51,000
Speaker 1: and so in that environment maybe banks would want to

620
00:31:51,120 --> 00:31:54,200
Speaker 1: lend more. But you have this sort of natural constraint

621
00:31:54,280 --> 00:31:58,640
Speaker 1: that's going on through the deposit through the deposits impact

622
00:31:58,800 --> 00:31:59,959
Speaker 1: on the asset side.

623
00:32:00,040 --> 00:32:02,120
Speaker 3: Yeah, it's a duration capacity constraint. And I should be

624
00:32:02,120 --> 00:32:04,560
Speaker 3: clear when I say deposits are shorter, I don't mean

625
00:32:04,560 --> 00:32:06,760
Speaker 3: they're more prone to run off. I mean that the

626
00:32:06,800 --> 00:32:09,520
Speaker 3: beta is higher. Therefore, in this example, or I have

627
00:32:09,600 --> 00:32:12,360
Speaker 3: zero coupon debt and floating rate debt, that mixture changes

628
00:32:12,400 --> 00:32:16,080
Speaker 3: such that I have less long term zero coupon debt

629
00:32:16,360 --> 00:32:18,760
Speaker 3: and more floating rate debt when the beta is higher. Right,

630
00:32:18,800 --> 00:32:21,480
Speaker 3: So it's just a higher degree to which the cost floats.

631
00:32:21,880 --> 00:32:24,400
Speaker 3: That means less interest rate risk in my liabilities. We

632
00:32:24,440 --> 00:32:27,240
Speaker 3: can call it shorter because it has less risk. And

633
00:32:27,280 --> 00:32:30,600
Speaker 3: when my liabilities get shorter, my balance sheet gets longer.

634
00:32:30,640 --> 00:32:34,400
Speaker 3: Because I'm short my liabilities, they get less duration. Then

635
00:32:34,440 --> 00:32:36,640
Speaker 3: the whole balance she gets more duration, and so there's

636
00:32:36,720 --> 00:32:39,760
Speaker 3: less capacity to support the long term fixed rate lending

637
00:32:39,760 --> 00:32:41,000
Speaker 3: that I was referring to. So this is where it's

638
00:32:41,000 --> 00:32:43,920
Speaker 3: about quantities, not pricing. Oh, I seek, it's within the

639
00:32:44,000 --> 00:32:46,760
Speaker 3: constraints on the bank's ability to take interest rate risk.

640
00:32:47,160 --> 00:32:50,080
Speaker 3: There's simply less room for long term fixed rate lending.

641
00:32:50,640 --> 00:32:54,760
Speaker 1: And then just on the general impact of having non

642
00:32:54,800 --> 00:32:59,520
Speaker 1: linear deposit beta. As rates are going up, does that mean,

643
00:32:59,600 --> 00:33:04,920
Speaker 1: like rates increase, that the effect of monetary policy tightening

644
00:33:04,960 --> 00:33:07,240
Speaker 1: gets amplified through the bank channel.

645
00:33:07,600 --> 00:33:10,200
Speaker 3: Well, there's a lot of academic literature about I would

646
00:33:10,320 --> 00:33:14,640
Speaker 3: necessarily amplified, but it's definitely there's a lot of academic

647
00:33:14,640 --> 00:33:16,440
Speaker 3: work that argues that this is one of the ways

648
00:33:16,480 --> 00:33:19,560
Speaker 3: that that monetary policy affects the economy because it's not

649
00:33:19,560 --> 00:33:25,040
Speaker 3: necessarily an applicification mechanism, it's just a mechanism. So you know,

650
00:33:25,560 --> 00:33:29,840
Speaker 3: basically argument is, in addition to the traditional channel, there's

651
00:33:29,880 --> 00:33:33,640
Speaker 3: this sort of duration channel that affects a very specific

652
00:33:33,760 --> 00:33:37,640
Speaker 3: subset of lending, but but but still affects it.

653
00:33:37,680 --> 00:33:42,360
Speaker 1: Should we should we all be researching higher paying bank accounts?

654
00:33:42,600 --> 00:33:44,200
Speaker 1: Is that the suggestion should we do this?

655
00:33:44,320 --> 00:33:46,640
Speaker 3: There are companies that do that. I mean, it's I

656
00:33:46,680 --> 00:33:51,080
Speaker 3: wouldn't necessarily say that's the solution to this particular problem,

657
00:33:51,640 --> 00:33:55,320
Speaker 3: but it you know, I've been I've always found it

658
00:33:55,360 --> 00:34:00,440
Speaker 3: interesting that this is generally true like this, the beta

659
00:34:00,440 --> 00:34:04,200
Speaker 3: effect is true, this cycle is true, last cycle. There's

660
00:34:04,240 --> 00:34:07,640
Speaker 3: a bank accounts have a value that's reflected in these betas,

661
00:34:07,920 --> 00:34:11,400
Speaker 3: and it is frustrating for people who want kind of

662
00:34:11,400 --> 00:34:13,320
Speaker 3: like a no arbitrage type model where no money is

663
00:34:13,360 --> 00:34:14,960
Speaker 3: left on the table. But at the end of the day,

664
00:34:15,719 --> 00:34:21,000
Speaker 3: the behavior of depositors is clear and the value they see,

665
00:34:21,040 --> 00:34:23,520
Speaker 3: which is not necessarily reflected in the interest rate, is real.

666
00:34:24,600 --> 00:34:27,440
Speaker 3: And uh and this is this is the risk that

667
00:34:27,480 --> 00:34:29,720
Speaker 3: the bank has, which makes it very hard to manage.

668
00:34:29,800 --> 00:34:31,400
Speaker 3: That's behavioral.

669
00:34:31,600 --> 00:34:34,080
Speaker 2: I still think we should pay banks for holding our money.

670
00:34:34,239 --> 00:34:38,040
Speaker 2: I mean, I know, don't no, I don't no. I know,

671
00:34:38,120 --> 00:34:40,839
Speaker 2: in theory, we're lending them money. But come on, they're

672
00:34:40,880 --> 00:34:42,400
Speaker 2: providing a service.

673
00:34:43,040 --> 00:34:45,959
Speaker 1: A negative interest rate thing all over again.

674
00:34:46,239 --> 00:34:50,760
Speaker 2: They're providing a service they make, they run a nice website.

675
00:34:50,840 --> 00:34:52,920
Speaker 2: I can pay my billage. We really, I really think

676
00:34:52,960 --> 00:34:55,000
Speaker 2: we should be paying them. I don't understand how they

677
00:34:55,040 --> 00:34:56,840
Speaker 2: pay us. I can't take interest.

678
00:34:57,160 --> 00:35:00,640
Speaker 1: Producers, please cut the spit off the podcast. No, keep

679
00:35:00,680 --> 00:35:04,240
Speaker 1: it in all right, Well, Josh, really appreciate you coming

680
00:35:04,280 --> 00:35:08,359
Speaker 1: on the show for another appearance. Again, I've lost count

681
00:35:08,719 --> 00:35:11,759
Speaker 1: that was a really great insight into how this kind

682
00:35:11,800 --> 00:35:14,960
Speaker 1: of opaque aspect of the banking business, but really the

683
00:35:14,960 --> 00:35:17,200
Speaker 1: heart of the banking business actually works.

684
00:35:17,200 --> 00:35:19,239
Speaker 3: So thank you so much, thanks for having me.

685
00:35:19,280 --> 00:35:20,520
Speaker 2: I think Josh gets a mug.

686
00:35:20,360 --> 00:35:23,359
Speaker 1: Now, because yeah, have we given you a month?

687
00:35:24,000 --> 00:35:27,160
Speaker 3: Okay, sorry, I'll take another month, but but I have

688
00:35:27,200 --> 00:35:27,480
Speaker 3: a month.

689
00:35:28,520 --> 00:35:30,239
Speaker 1: You take a mug and give it to you next

690
00:35:30,239 --> 00:35:32,319
Speaker 1: time you see your own powers, give it to him

691
00:35:32,360 --> 00:35:47,800
Speaker 1: and tell him that we want to come on the show. Joe,

692
00:35:47,840 --> 00:35:50,840
Speaker 1: have I convinced you to open up a certificate of

693
00:35:50,880 --> 00:35:53,200
Speaker 1: deposit or like a different bank account.

694
00:35:53,239 --> 00:35:55,719
Speaker 2: No, I'm gonna I'm gonna email my bank tonight and

695
00:35:55,840 --> 00:35:58,160
Speaker 2: ask if there's any way that I can get pay

696
00:35:58,239 --> 00:36:00,480
Speaker 2: They pay them a little bit for the great service

697
00:36:00,520 --> 00:36:01,200
Speaker 2: they provide me.

698
00:36:01,440 --> 00:36:05,239
Speaker 1: I think you've missed the entire point of this conversation. No,

699
00:36:05,400 --> 00:36:08,680
Speaker 1: but it is really interesting in some respects. It's always

700
00:36:08,680 --> 00:36:12,719
Speaker 1: surprising to me how much new information there is to

701
00:36:12,880 --> 00:36:16,320
Speaker 1: learn about the way that finance and economics actually works.

702
00:36:16,360 --> 00:36:19,880
Speaker 1: Because you think that in you know, throughout history, people

703
00:36:20,000 --> 00:36:23,799
Speaker 1: have modeled deposit betas as sort of linear or having

704
00:36:23,840 --> 00:36:26,719
Speaker 1: a stable relationship with benchmark interest rates. But then a

705
00:36:26,719 --> 00:36:29,960
Speaker 1: paper like this comes along and actually says, no, it

706
00:36:30,000 --> 00:36:31,239
Speaker 1: doesn't really work like that.

707
00:36:31,600 --> 00:36:34,719
Speaker 2: It really is fascinating how young it all seems, how

708
00:36:34,760 --> 00:36:38,640
Speaker 2: new it all seems. There's a line in Josh's paper saying,

709
00:36:38,920 --> 00:36:42,520
Speaker 2: first deposit convexity amplifies the bank lending channel of monetary

710
00:36:42,800 --> 00:36:45,960
Speaker 2: transmission EG and then he cites a paper from Berneki

711
00:36:46,000 --> 00:36:47,880
Speaker 2: and Ail and Blinder in nineteen eighty eight, like that's

712
00:36:47,920 --> 00:36:49,759
Speaker 2: not even that long ago. The idea that some of

713
00:36:49,800 --> 00:36:53,600
Speaker 2: these really interesting ideas or sort of core ideas, some

714
00:36:53,760 --> 00:36:57,080
Speaker 2: of them. The key paper that you say it is

715
00:36:57,120 --> 00:37:00,399
Speaker 2: thirty It feels like in the we're just it's day

716
00:37:00,440 --> 00:37:02,840
Speaker 2: one in our understanding of this. Sometimes it feels like that.

717
00:37:03,120 --> 00:37:06,279
Speaker 1: No, absolutely, and we're also still trying to understand it

718
00:37:06,520 --> 00:37:10,280
Speaker 1: in a very different environment. And we didn't even really

719
00:37:10,600 --> 00:37:12,960
Speaker 1: touch on this maybe Josh mentioned it once, but you know,

720
00:37:13,480 --> 00:37:17,040
Speaker 1: we've had QI and so interest rate hikes are happening

721
00:37:17,120 --> 00:37:19,799
Speaker 1: at the same time that the FED is reducing its

722
00:37:19,840 --> 00:37:23,600
Speaker 1: balance sheet, and that impacts assets as well. We also

723
00:37:23,640 --> 00:37:27,120
Speaker 1: have things like the reverse Repo Facility, the RRP, which

724
00:37:27,120 --> 00:37:29,960
Speaker 1: we didn't have before, and so we're still learning things

725
00:37:30,000 --> 00:37:33,840
Speaker 1: about how all of this works. Against a very different

726
00:37:33,960 --> 00:37:37,840
Speaker 1: financial and economic backdrop, So there really are so many

727
00:37:37,920 --> 00:37:38,680
Speaker 1: moving parts.

728
00:37:39,080 --> 00:37:41,000
Speaker 2: And then just the idea of the pressure that this

729
00:37:41,080 --> 00:37:44,879
Speaker 2: puts on the asset side and the constraints that come up,

730
00:37:44,960 --> 00:37:47,120
Speaker 2: and the idea that okay, one thing moves, and then

731
00:37:47,400 --> 00:37:49,759
Speaker 2: you know, you can only be so limited in how

732
00:37:49,840 --> 00:37:54,840
Speaker 2: quickly you can hedge or alter or change your asset

733
00:37:54,880 --> 00:37:57,320
Speaker 2: mix for the bank. So lots of interesting stuff.

734
00:37:57,560 --> 00:37:59,680
Speaker 1: Yeah, I wouldn't want to be a risk manager at

735
00:37:59,680 --> 00:38:01,600
Speaker 1: a bank, but I also wouldn't want to pay them

736
00:38:01,719 --> 00:38:04,480
Speaker 1: for managing my money, So I'm a hypocrite.

737
00:38:04,520 --> 00:38:04,879
Speaker 3: All right?

738
00:38:05,080 --> 00:38:05,839
Speaker 1: Shall we leave it there?

739
00:38:05,920 --> 00:38:06,640
Speaker 2: Let's leave it there.

740
00:38:06,760 --> 00:38:09,760
Speaker 1: This has been another episode of the Odd Blots podcast.

741
00:38:09,880 --> 00:38:12,720
Speaker 1: I'm Tracy Alloway. You can follow me at Tracy Alloway.

742
00:38:12,960 --> 00:38:15,800
Speaker 2: And I'm Jill Wisenthal. You can follow me at the Stalwart.

743
00:38:16,080 --> 00:38:19,719
Speaker 2: Follow our producers Carmen Rodriguez at Carmen armand dash Ol

744
00:38:19,719 --> 00:38:23,440
Speaker 2: Bennett at Dashbot and Kelbrooks at Kelbrooks. And thank you

745
00:38:23,480 --> 00:38:26,680
Speaker 2: to our producer Moses onm. For more Oddlogs content, go

746
00:38:26,719 --> 00:38:30,000
Speaker 2: to Bloomberg dot com slash odd Lots, where we have transcripts,

747
00:38:30,040 --> 00:38:33,440
Speaker 2: a blog and a newsletter and you can check twenty

748
00:38:33,480 --> 00:38:36,359
Speaker 2: four to seven with fellow listeners in our discord, one

749
00:38:36,400 --> 00:38:38,399
Speaker 2: of my favorite places on the Internet to hang out

750
00:38:38,840 --> 00:38:41,560
Speaker 2: discord dot Gugi, slash outline and.

751
00:38:41,719 --> 00:38:43,960
Speaker 1: If you enjoy odlots, if you like it when we

752
00:38:44,040 --> 00:38:47,600
Speaker 1: dive deep into the mechanics of bank deposits, then please

753
00:38:47,800 --> 00:38:51,239
Speaker 1: leave us a positive review on your favorite podcast platform.

754
00:38:51,280 --> 00:39:20,000
Speaker 1: Thanks for listening in in