Speaker 1: Hello, and welcome to another episode of the All Thoughts Podcast.
Speaker 1: I'm Tracy Alloway and I'm Joe. Why isn't thal so Joe.
Speaker 2: We've had a busy few months.
Speaker 3: Yeah, we really did. We were all over We crisscrossed
Speaker 3: the country. We did all three coast East Coast California,
Speaker 3: the third coast Texas. We went to California twice. Yep,
Speaker 3: in about three weeks, I think. But we have a
Speaker 3: nice little break now.
Speaker 1: Yes, I for one am grateful to not be living
Speaker 1: out of a suitcase for a while. But our last
Speaker 1: stop in the Whirlwind America tour was in Las Vegas.
Speaker 3: That was so fun. I loved going to Vegas. I
Speaker 3: really loved you. I love Vegas. It was so cool
Speaker 3: that I got the opportunity to join you in Las Vegas.
Speaker 1: Okay, listeners, this is where we're going to get into
Speaker 1: a little bit of an argument.
Speaker 3: But you're going to We're going to hear Odd Lot's
Speaker 3: co host air some dirty laundry.
Speaker 1: The day before, No, the day he was supposed to
Speaker 1: actually fly out to Las Vegas, Joe changed his mind.
Speaker 1: You decided Vegas isn't for.
Speaker 3: You, So, listeners, I love Vegas. It's one of my
Speaker 3: favorite cities in the country. I like playing poker, I
Speaker 3: love the strip, I love the lights, I love the
Speaker 3: water consumption in the desert. I was really excited. And
Speaker 3: then I got to the airport on this really.
Speaker 2: Nice He wasn't feeling it.
Speaker 3: No, it's not true. I got to the airport on
Speaker 3: this really nice fall day, and about thirty minutes after
Speaker 3: I got to the airport, my flight was pushed back
Speaker 3: about five hours. And I was only going to be
Speaker 3: in Vegas for twenty four hours as it was. And
Speaker 3: I wasn't even sure that the flight was going to
Speaker 3: take off when they said because actually who was the
Speaker 3: second delay at the time. And I did have family
Speaker 3: in town, which is also true, and Terracy was already
Speaker 3: out there, and Racy is a very capable co host,
Speaker 3: more than capable co host. Like a lot of excuse Joe,
Speaker 3: and I said, please, Tracy, can you just do this?
Speaker 3: Can you just do me a solid and do this
Speaker 3: episode by yourself and Tracy without any complaint or frustration.
Speaker 2: Well, at the time, I didn't complain.
Speaker 1: I complained when I came.
Speaker 3: No making me feel bad about myself obliged.
Speaker 1: Let me just say the world's smallest microscope would not
Speaker 1: be able to locate my sympathy for this argument. You
Speaker 1: know what, No, Okay, let's leave it there. I just
Speaker 1: never okay, listeners, let me say though, that you are
Speaker 1: in for a treat, as is Joe, because he wasn't there,
Speaker 1: so this is the first time he's going to hear
Speaker 1: this interview. But we spoke, or I spoke with Michael Sue,
Speaker 1: the Acting Comptroller of the Currency, and we had a
Speaker 1: really interesting conversation. This was a live episode recorded on
Speaker 1: stage at Money twenty twenty, which you might know as
Speaker 1: the big sort of fintech gathering, and we talked a
Speaker 1: lot about the intersection between banking and technology and Joe.
Speaker 1: Here's where it gets kind of odd, lotsy. Michael has
Speaker 1: been arguing for a while that a lot of what's
Speaker 1: happening in banking right now, and particularly in payments, kind
Speaker 1: of looks like a supply chain. So a lot of
Speaker 1: banks are outsourcing different functions like payments to third party vendors,
Speaker 1: and this presents a bunch of new and interesting problems
Speaker 1: and risks and I guess also opportunities.
Speaker 3: It's so interesting to think about finance in this realm,
Speaker 3: and you can imagine how these things go in cycles,
Speaker 3: because you could imagine at some point these functions were
Speaker 3: very simple. It was all in how it's vertically horizontally
Speaker 3: integrated and so forth. And then, like many other areas
Speaker 3: of the economy, companies realized, okay, wait, what if we
Speaker 3: have one specialty. Other companies then specialize in this specific thing.
Speaker 3: I remember we did that episode about community banks and
Speaker 3: how they had to outsource a lot of their own
Speaker 3: functions about cybersecurity and so forth because they don't have
Speaker 3: maybe the capacity of a JP Morgan. So it is
Speaker 3: interesting to think about, like the supply chain of money
Speaker 3: in that.
Speaker 1: Rest Well, this is exactly it. So in one respect,
Speaker 1: it's a sort of natural evolution of the economy. Everyone
Speaker 1: becomes more specialized, everyone becomes more efficient, the business model
Speaker 1: becomes more streamlined. But as Michael points out, there are
Speaker 1: these sort of new problems that are potentially thrown up
Speaker 1: by everyone outsourcing kind of critical functions in some respects. So,
Speaker 1: without further ado, take a listen to this live episode
Speaker 1: with Michael Sue recorded in Las Vegas, Sans Joe at
Speaker 1: Money twenty twenty. Michael Sue, acting Controller of the OCC.
Speaker 1: Thank you so much for coming on on.
Speaker 4: Lots, Tracy, thanks so much for having me. Love the
Speaker 4: show and it's through all honor to be here.
Speaker 1: Oh, I appreciate that. So I'm sort of in a
Speaker 1: reflective mood lately. And I used to be a banking correspondent.
Speaker 1: I covered a lot of fintech back when people were
Speaker 1: super excited about it. I feel like they're not as
Speaker 1: excited about it anymore. This is a really embarrassing. First question,
Speaker 1: what is the OCC do and like, how does it compare?
Speaker 1: I feel like there are so many different banking regularly.
Speaker 4: How much time do we have?
Speaker 1: Yeah, well, there's the FDIC, there's the FED, there's the OCC.
Speaker 1: Who's doing what? How often do you step on each
Speaker 1: other's toes?
Speaker 4: We coordinate a lot, let me put it that way.
Speaker 4: So the OCC regulates and supervises nationally chartered banks and
Speaker 4: federal savings associations. So, just to put some numbers on that,
Speaker 4: it's about eleven hundred banks. Wow, Okay, now we've got forty.
Speaker 4: We got over four thousand banks in the banking system,
Speaker 4: but by assets, the largest banks tend to be nationally chartered.
Speaker 4: You know your your JP Morgan chases and your cities
Speaker 4: in the world. So by assets, the occ supervises and
Speaker 4: regulates about two thirds of the banking assets. Oh, got
Speaker 4: it in the system, right, So you get a little
Speaker 4: bit of that eighty twenty year rule for nationally charter banks.
Speaker 4: Banks can have state charters, and they can be members
Speaker 4: or not members of the Federal Reserves. So we have
Speaker 4: a complicated Actually your listeners might be interested in this,
Speaker 4: but maybe we'll spare them for there.
Speaker 2: Our listeners love detail.
Speaker 4: So there's a different kind of landscape. But we coordinate
Speaker 4: quite a bit at the federal level on all the
Speaker 4: major rulemakings because we want a level system. We want
Speaker 4: a level banking system. Now, I think it was really
Speaker 4: interesting about the occ IS historically. So we were founded
Speaker 4: in eighteen sixty three during the Civil War. Wow, and
Speaker 4: before the OCC you had free banking. And this is
Speaker 4: relevant for stable coins because that system. But they all
Speaker 4: issued their own currency, yes, I remember this. So you
Speaker 4: had the Bank of Tracy, and you had the Bank
Speaker 4: of Mike and the Bank of Joe, and each bank
Speaker 4: would issue its own dollar, different size, different color, but
Speaker 4: it would be a dollar. And so people are walking
Speaker 4: around with all these different notes and in theory they
Speaker 4: could go back to the Bank of Tracy and say,
Speaker 4: I want a dollar's worth of gold right specie, And
Speaker 4: sometimes you had it and sometimes you didn't, and so
Speaker 4: there would be discount rates on these dollars, and so
Speaker 4: it was a mess. And you imagine like there's panics
Speaker 4: all the time. There's a lot of fraud, and there
Speaker 4: were money men. People would walk go around with bags
Speaker 4: full of money from town to town to exchange these
Speaker 4: dollars because you know, if you're a farmer, you want
Speaker 4: to be able to do your business. So during the
Speaker 4: Civil War, Sam and Chase is like, hey, we got
Speaker 4: to fund the war and we got to bring the
Speaker 4: union together. So they've got they passed a series of laws.
Speaker 4: They've got now a green back, unified dollar, and they
Speaker 4: create national banks to basically both issue those and then
Speaker 4: take deposits and basically buy treasury bonds which funds the war.
Speaker 2: That's crazy.
Speaker 1: So the occ was around even before the fest yes,
Speaker 1: way before.
Speaker 2: So you have one up on them so well, and.
Speaker 4: All we do is supervision. It's a we are a
Speaker 4: very supervisory focused agency. And so we've got a long
Speaker 4: deep history and you know, the stable coin debates. You know,
Speaker 4: this is less relevant now, but a lot of times
Speaker 4: folks were saying, well, why don't we want more? Don't
Speaker 4: we want stable coins? And it's like the stable coin
Speaker 4: landscape now looks a lot like free banking because each
Speaker 4: of these issuers is different and they try differently. I mean,
Speaker 4: if you go on the and you look these things
Speaker 4: up and it's not a long term sustainable system.
Speaker 1: Well, since we're on the topic of stable coins, as
Speaker 1: our Bloomberg opinion columnist Matt Levine says, often it does
Speaker 1: seem like a lot of crypto and maybe some aspects
Speaker 1: of fintech are learning the lessons of the financial system
Speaker 1: development sort of in real time. And on the topic
Speaker 1: of stable coins, you know, we did have a big
Speaker 1: collapse last.
Speaker 2: Year with Tara Luna.
Speaker 1: You at the OCC have always taken a sort of
Speaker 1: cautious approach to stable coins. What was it that kind
Speaker 1: of worried you about their development? What was it that
Speaker 1: you saw that made you think, wait a second? And
Speaker 1: in some respects it's kind of surprising because stable coins
Speaker 1: were supposed to be the safest aspect of the crypto
Speaker 1: system and then turned out to be very problematic. Although
Speaker 1: I guess you can say that about a lot of
Speaker 1: financial history. The safest assets often turn out to be
Speaker 1: the problematic ones. But yes, what was it that made
Speaker 1: you take that cautious approach?
Speaker 4: So if we back up a little bit and you know,
Speaker 4: just the rise of crypto. So I became Acting Comptroller
Speaker 4: in May of twenty twenty one, and that year alone,
Speaker 4: crypto was just on a.
Speaker 2: That was a big that was a big year of
Speaker 2: growth for.
Speaker 4: Crypto in general and stable coins, and so there's a
Speaker 4: lot of hype, a lot of fomo, and it felt
Speaker 4: familiar to me because it felt a lot like derivatives
Speaker 4: and structured finance circa two thousand and four to two
Speaker 4: thousand and six.
Speaker 1: Right, you pool all this stuff and then you trade
Speaker 1: it as well, one for one.
Speaker 4: And so there's Julian Ted got this great book, Fools Gold,
Speaker 4: and I recommend it to everybody because chapter one innovation,
Speaker 4: Chapter two, perversion, Chapter three crisis, and so this cycle
Speaker 4: happens over. The first innovations for credit to fault swaps
Speaker 4: were really really good. They solved problems, it was amazing,
Speaker 4: it's great, and then people are just innovating for innovation's sake,
Speaker 4: and then you have the high priests who understands this. Oh,
Speaker 4: only the p HD with you know, who understand you know,
Speaker 4: nuclear physics can actually explain the stuff, and that leads
Speaker 4: to it creates an environment where it can just kind
Speaker 4: of eat itself. And so I had a feeling within
Speaker 4: crypto maybe that's what's happening. And so of course I
Speaker 4: think we do what we do best in government. We
Speaker 4: dig in, what are the facts, let's like crack the
Speaker 4: thing open and try to understand this best we can.
Speaker 4: And the more we looked, the more worrying signs of like, hmm,
Speaker 4: this is not all it's cracked up to be. And
Speaker 4: especially with stable coins, there was a big gap between
Speaker 4: the talk and the reality, and so that just sets
Speaker 4: a whole bunch of flags up. And so, yeah, you're
Speaker 4: trying to telegraph very clearly to banks like, look, if
Speaker 4: you're going to get into crypto, it's got to be safe,
Speaker 4: sound and fair. Do your homework, you know, make sure
Speaker 4: you have those controls in place. And so for the
Speaker 4: banks that were, you know, like I call them crypto curious,
Speaker 4: and there were a lot at the time, they lost
Speaker 4: interest because I think they recognized, oh that that takes
Speaker 4: an awful lot of work, and then once the crypto
Speaker 4: winter happened, you know, a lot of that, there was
Speaker 4: a big pull.
Speaker 1: Back from that, right Well, the one other thing I
Speaker 1: want to ask is stable coins aside. You know, we
Speaker 1: did see a little bit of contagion from the crypto
Speaker 1: turmoil of twenty twenty two into the banking system. So
Speaker 1: notably we saw Silvergate collapse, and I guess we can
Speaker 1: debate how much of that was due to pure crypto
Speaker 1: or other dynamics with deposit outflows and things like that.
Speaker 1: But does it feel to you looking at the US
Speaker 1: banking landscape now in twenty twenty three, that there's enough
Speaker 1: of a barrier between regulated banks and crypto, there's enough
Speaker 1: of a sort of insulation there.
Speaker 4: So I'm going to knock on I'm not sure if
Speaker 4: this would I'm want to knock on it.
Speaker 1: Our producer Carmen's going to kill you for making ambient
Speaker 1: noise during the podcast.
Speaker 4: The short answer is, I think so. And that's in
Speaker 4: part because across all the federal banking agencies, we've been
Speaker 4: very clear and unified about how we feel and what
Speaker 4: our expectations are about banks engaging in risky activities such
Speaker 4: as crypto those risks out, you provide an interagency guidance. Again,
Speaker 4: it's not to say that banks can't do it, but
Speaker 4: if a bank is going to do it, whatever it is,
Speaker 4: it's got to be safe, sound, and fair, and they
Speaker 4: have to prove that to us. We feel that that's
Speaker 4: very appropriate given what's taking place in the crypto space. Again,
Speaker 4: if you go back, I think the stats are about
Speaker 4: a billion dollars of fraud, two billion dollars of scams,
Speaker 4: and three billion dollars of hacks last year. Like that's
Speaker 4: that's a risky space. That's not to say everybody's bad,
Speaker 4: because that's not true. There are good players in that space,
Speaker 4: but it's a risky space, and so we expect banks
Speaker 4: to do that work. And I think most banks either
Speaker 4: they're doing that work or they're decided it's just not
Speaker 4: really worth it.
Speaker 2: So crypto is by no means a monolith.
Speaker 1: And even though you've taken a cautious approach to stable coins,
Speaker 1: I get the sense that you're a little bit more
Speaker 1: interested in another aspect of crypto, tokenization. You're holding a
Speaker 1: big tokenization conference, right, what's the draw there?
Speaker 4: So is hosting a tokenization symposium on February eighth, Market
Speaker 4: calendars open to the public. Our keynote is going to
Speaker 4: be Hyon Sugtion from the BIS. I know you enjoyed
Speaker 4: one of our favorites. Yeah, and and Hun is fantastic
Speaker 4: because he's got a very broad perspective across both monetary policy, research, banking,
Speaker 4: and all things kind of crypto digital assets related. Because
Speaker 4: that the BIS, I've got the innovation hub, and there's
Speaker 4: a lot of intersection between you know, his research and
Speaker 4: what they've been doing. In a word, there's been a
Speaker 4: growing divide between crypto and tokenization and tokenization of real
Speaker 4: world assets and liabilities. Most crypto is not backed by
Speaker 4: anything bitcoin, ether, et cetera, or if yes or stable coins.
Speaker 4: Tokenization is a different game, you know crypto's it's retail
Speaker 4: focused and most of the interest in those coins is
Speaker 4: based on hope for speculative gain. Tokenization is about solving
Speaker 4: a settlement problem. And this is real for your listeners.
Speaker 4: Now we're in the plumbing of the system and for
Speaker 4: those who know, like when you buy a share of stock,
Speaker 4: there's all this stuff that happens in the background. It
Speaker 4: involves multiple players, there's different handoffs, there's risk that gets
Speaker 4: transformed into different ways. It's complicated, and it's it creates frictions,
Speaker 4: and it creates costs. So if there's a way to
Speaker 4: make that settlement process better, why not. And I think
Speaker 4: that's the that's the promise of tokenization, is that some
Speaker 4: of those risks and frictions can be addressed by basically
Speaker 4: taking messaging and settlement and combining that.
Speaker 1: And can you explain that a little bit further Because
Speaker 1: when I think I think tokenization, I think, like, I
Speaker 1: presume these are centralized databases, and then I think, well,
Speaker 1: what's the difference between a tokenized central database versus an
Speaker 1: Excel spreadsheet? Right that's password protected? Yes, Like what is
Speaker 1: the innovation here? Right?
Speaker 4: So this is a very important point blockchain. I I
Speaker 4: didn't say.
Speaker 2: Blockchain, No you didn't, okay, And I think that's a.
Speaker 4: Very important distinction, right. I think there's been a little
Speaker 4: bit of a how should I what's the best way
Speaker 4: to put it? It's almost like a raw shot test,
Speaker 4: you know, you say blockchain, and some folks that, oh,
Speaker 4: that's the next big thing, whether they understand it or not, like, oh,
Speaker 4: it's super efficient and fast. It's not super efficient or fast.
Speaker 1: I mean, I remember that the years when we were
Speaker 1: going to put everything on the blockchain, like groceries or
Speaker 1: like balsamic vinegar was going to be traceable on the
Speaker 1: blockchain to make sure it came from a specific region
Speaker 1: and things like that.
Speaker 4: Right, and so the design of public blockchains was there
Speaker 4: were certain reasons for doing it. If you go back
Speaker 4: to the the Satoshi Nakamoto white paper, that paper is
Speaker 4: pretty fascinating and it's a really interesting paper, and it
Speaker 4: makes the case for why you should do something that way.
Speaker 4: But to your point, Tracy, if the problem you're trying
Speaker 4: to solve is settlement frictions, you don't need that, and
Speaker 4: in fact, that probably just slows things down and gums
Speaker 4: things up. They're better to do that. Now, what's the
Speaker 4: what's the innovation? That's your question. What's the innovation? It's
Speaker 4: basically taking messaging and settlement and combining it. That's different
Speaker 4: because right now, when you again we'll use the example,
Speaker 4: when you buy a share of stock, you're sending a
Speaker 4: message to buy, you know, a share of Tesla or something,
Speaker 4: and then that message goes and then a bunch of
Speaker 4: other things have to happen before that thing actually settles.
Speaker 4: Your money gets transferred, you get a share of stock,
Speaker 4: and that's held somewhere, and you have everyone's fully aware
Speaker 4: that that has happened. With tokenization, you actually collapse a
Speaker 4: lot of those steps into into a single thing.
Speaker 1: Oh, I see, So multiple processes can exist as sort
Speaker 1: of like one thing exactly that can then move through
Speaker 1: the system and be verified exactly.
Speaker 4: And you know, for again, for the for the for
Speaker 4: the banking nerds and the payment nerds out there, this
Speaker 4: is exciting. Now it's hard to tell this story to
Speaker 4: a retail because it's hard to see that difference. But
Speaker 4: those costs and those frictions add up, and there's quite
Speaker 4: a bit of time and effort that gets put into identifying, addressing, assessing,
Speaker 4: managing those risks and frictions. And so you know that
Speaker 4: in the for the regulators in the central banks that
Speaker 4: had been kind of interested in this space, a lot
Speaker 4: of the the more of the excitement going forward is
Speaker 4: really in this kind of tokenization space rather than in
Speaker 4: kind of the retail space, which I think is been
Speaker 4: colored by a lot of the recent of vicaild accent.
Speaker 1: Well, since we're on the topic of financial innovation and
Speaker 1: we are essentially at a fintech conference. We're at Money
Speaker 1: twenty twenty. I want to ask you about a recent
Speaker 1: publication from the OCC. It's the inter Agency has a
Speaker 1: very catchy name, the inter Agency Kidance on Third Party Relationships.
Speaker 1: Is that just basically a way of saying that you're
Speaker 1: worried about fintech partnerships with the banks.
Speaker 4: So the guidance is broader than just that, but you're
Speaker 4: onto something. So let me let me just zoom out
Speaker 4: for a second. That guidance is geared towards banks relationships
Speaker 4: with any vendors, any third parties.
Speaker 2: Okay, so payments as well and things like.
Speaker 4: That, but a bunch of others as well. And so
Speaker 4: you know, the story I like to tell is your
Speaker 4: way back in the beginning, all of banking was done
Speaker 4: by banks, and so you can imagine like there's like
Speaker 4: a box and you can label that banks and banking
Speaker 4: ills the same box. They did everything by themselves, and
Speaker 4: then over time they had to rely on others to
Speaker 4: do certain things. And you know, probably the clearest example
Speaker 4: is like with the core processors. A lot of banks
Speaker 4: rely on the core processors to do certain processing accounting,
Speaker 4: you know, reconciliations, et cetera. And so that's now there's
Speaker 4: a dependency. And so as a regulator, you say, how
Speaker 4: do I ensure that everything that that bank does is safe,
Speaker 4: sound and fair. Oh, I need to make sure that
Speaker 4: what they've done with that third party is up to snuff. Right,
Speaker 4: If it's slipshot, if it's done sloppily, things can break
Speaker 4: and then the bank will say, oh, that wasn't my fault,
Speaker 4: and they'll blame it on someone else. But at the
Speaker 4: end of the day, the bank itself is not going
Speaker 4: to be safe. We don't have a safe and sound system.
Speaker 4: So we want to make sure that that standard kind
Speaker 4: of carries through. It's almost like an extension of the bank,
Speaker 4: if you will. Okay, that's one on one. Now we
Speaker 4: fast forward to today. Now it's way more complicated because
Speaker 4: not only do you have lots of different kinds of vendors,
Speaker 4: Like a lot of banks are now saying, hey, why
Speaker 4: stop with cores. We can do this with a lot
Speaker 4: of because our comparative vantage is different than a lot
Speaker 4: of the technology that's out there. There's a whole bunch
Speaker 4: of different use cases in terms of vendors. Now the
Speaker 4: tables are being turned. Now you've got some FinTechs that
Speaker 4: are going to customers say we will be the interface
Speaker 4: with you to take a deposit and make a loan,
Speaker 4: et cetera. But we need a bank to actually do that,
Speaker 4: and so then they go to the bank. So in
Speaker 4: the sense the bank is the is the provider. That's
Speaker 4: why it's banking as a service, the bank providing that service.
Speaker 4: But the dependency is flipped around.
Speaker 1: Yeah, it's almost like, you know, we used to talk
Speaker 1: about the disintermediation of banks, and someone brought this up
Speaker 1: in our discord recently. Apparently I wrote an article which
Speaker 1: I'd forgotten, but all the time, Yeah, when there was
Speaker 1: all that excitement about peer to peer lending or direct lending. Yeah,
Speaker 1: Wells Fargo apparently like put out a notice to its
Speaker 1: employees saying, please do not invest in peer to peer
Speaker 1: lending because they're a direct competitor to us. Right, the
Speaker 1: whole idea was cut out the banks and people could
Speaker 1: make loans to each other. But now it's almost like disaggregation.
Speaker 1: It's we're disaggregating the banks. We're sort of like taking
Speaker 1: pieces away, or like there are new players, new companies
Speaker 1: that are tapping the banks for specific pieces it's all
Speaker 1: very confusing.
Speaker 4: Well it's confusing, but there's there's a logic to it.
Speaker 4: And so the analogy I like to draw is if
Speaker 4: you go back to pre two thousand and eight capital
Speaker 4: markets disintermediated banking, and it was really the the lending
Speaker 4: and the deposit taking right. Money funds took deposit taking,
Speaker 4: and securitization took blending.
Speaker 1: By the way, this is how you get a financial
Speaker 1: journalists attention. When you say here's a pre two thousand
Speaker 1: and eight analogy, I'm all ears, I'm like, yes, tell
Speaker 1: me so.
Speaker 4: If you drew a picture and one of my favorite
Speaker 4: pictures of this Zultan pos Aar, who is another favorite,
Speaker 4: He drew this map, his famous map.
Speaker 1: That he had pinned on the wall of the New
Speaker 1: York Fast more than I mean a bunch of a
Speaker 1: bunch of folks had this.
Speaker 4: It was a gigantic map, and uh, you know again
Speaker 4: for the nerds on the podcast, it was it's basically
Speaker 4: t accounts, assets, liabilities, equity, but for different points of
Speaker 4: a system. And it did what any good financial follow
Speaker 4: the money right. You just follow the money.
Speaker 1: Right, how it's moving through the banking system and the
Speaker 1: shadow banking system and.
Speaker 4: That so Zultan and then Adam Ashcraft was a co
Speaker 4: author on the Shadow Banking paper, which basically said what
Speaker 4: banks used to do as lenders has now been broken
Speaker 4: up into six pieces or multiple pieces, and each piece
Speaker 4: is being done by a differnt group. So origination, remember
Speaker 4: new century, and option to one. They would do originations
Speaker 4: for mortgages, warehouse lenning, someone else would do warehouse lending.
Speaker 4: Distributions someone else would do. So you and you look
Speaker 4: at that and say, well does that make sense? Well,
Speaker 4: there's like a specialty there, okay, and maybe they're particularly
Speaker 4: good at that, and there's economies of scale.
Speaker 2: Yeah, they would argue efficiency.
Speaker 4: Right, efficiencies, and so you'd say that that logic in
Speaker 4: and of itself on a micro scale made sense. It's
Speaker 4: only when you zoomed out and you looked at the
Speaker 4: whole thing that you said, oh, oh does this hold?
Speaker 4: And I think the real the insight from the you know,
Speaker 4: the Posar Ashcraft work was all the FED facilities matched
Speaker 4: up to each of those points. So it's almost like
Speaker 4: the discount window was recreated for what had been disintermediated,
Speaker 4: which is quite intuitive actually. So it gets back to
Speaker 4: this idea I have, which which I think others have
Speaker 4: talked about it's like you've got the conservation of matter.
Speaker 4: Like risk is neither created nor destroyed. It just it
Speaker 4: can transform and be chopped up and reallocated. But it
Speaker 4: all adds up to the same thing. And so now
Speaker 4: we fast forward to today and this is what's happening
Speaker 4: with payments. And if you talk to the payments companies,
Speaker 4: they say, it doesn't make any sense to basically have
Speaker 4: a full system like front to back on this, like
Speaker 4: you want to slice it up, because different companies do
Speaker 4: a different job on things where they're better at it.
Speaker 4: So it's very similar logic to the capital markets systant mediation.
Speaker 4: And again each point makes sense when you do it
Speaker 4: one by one, when you zoom out, what does it
Speaker 4: look like and what's the risk reward and who's bearing
Speaker 4: what risk?
Speaker 1: Well, okay, so just on this point, I mean, maybe
Speaker 1: I'm reading too much into the two thousand and eight analogy,
Speaker 1: but like one of the reasons it all went off
Speaker 1: the rails is because as you had all these different
Speaker 1: entities doing different things, there was kind of less and
Speaker 1: less return for all of them, and so the temptation
Speaker 1: was to start levering it up and try to amplify
Speaker 1: whatever yields you could get. Is that the risk here
Speaker 1: or I guess talk to us concretely about the risks.
Speaker 1: And then secondly, is there enough for return to actually
Speaker 1: go around?
Speaker 2: Because when I look at all.
Speaker 1: These different little pieces of banking services, it feels like
Speaker 1: there are so many players all kind of offering similar things.
Speaker 4: So I think that's a very very valid question. And
Speaker 4: I know there have some both fintech and bank analysts
Speaker 4: who have kind of looked into this, and they're raising
Speaker 4: very similar questions like is there enough to go around
Speaker 4: to support such a complex ecosystem. But let's take a
Speaker 4: step back. Let's go back to banking as a service.
Speaker 4: With banking as a service, there's a spectrum, and at
Speaker 4: one end of the spectrum, you'll have what I think
Speaker 4: of something that's relatively simple. You've got a fintech, you've
Speaker 4: got a really cool app targeted at a population that
Speaker 4: they're really familiar with, they know it's going to work,
Speaker 4: and you've got a bank who traditionally doesn't know how
Speaker 4: to engage to acquire that customer. So they partner together
Speaker 4: and they said, let's go get that customer together, and
Speaker 4: the bank says that customer is my customer as much
Speaker 4: as it is yours, and they apply all the KYC
Speaker 4: and the compliance and all of the bells and whistles
Speaker 4: that they would provide to any other customer is apply
Speaker 4: to that customer. Very simple, hard to scale, but relatively simple, straightforward,
Speaker 4: and then they you know, what's the rev split between
Speaker 4: those two and they can negotiate that. At the other
Speaker 4: end of the spectrum, you've got banks, who then who
Speaker 4: do they deal with. They're like, this is too complicated.
Speaker 4: We just want to provide the banking as a service,
Speaker 4: but we want to do it at scale and low. Behold.
Speaker 4: There's some companies out there. This is what they do.
Speaker 4: So you know, often they're referred to as middleware and
Speaker 4: they'll say, well, if you come to us, we have
Speaker 4: partnerships with lots of FinTechs and we have partner and
Speaker 4: they tell the FinTechs we have partnership with lots of banks.
Speaker 2: It's funny.
Speaker 1: It's like there's wear all the way down.
Speaker 2: Yes, yeah, so funny.
Speaker 4: And so they go to them and again there I
Speaker 4: don't want to paint all of them with Abroad, there
Speaker 4: is a there is a spectrum on this, and some
Speaker 4: of it is done in a way that I think
Speaker 4: can be safe, sound and fair, and others we've seen
Speaker 4: that's not the case. And so in those instances, the
Speaker 4: bank has no idea who the real customer is and
Speaker 4: the fintech is like, look, we don't do compliance, we
Speaker 4: don't do ky. See, someone else shall handle that. And
Speaker 4: so we're right back to this picture of each slice
Speaker 4: is doing something slightly different. And you know, in my
Speaker 4: experience where that happens unless there's a lot of clarity
Speaker 4: about who's bearing what responsibility when bad things happen, everyone's
Speaker 4: pointing at each other and that that's a mess. And
Speaker 4: we don't want that. And so, you know, it's really
Speaker 4: important for us as this ecosystem evolves, and we've got
Speaker 4: an eye on that and we guide it towards, you know,
Speaker 4: things that are healthy, because there is good innovation out
Speaker 4: there that can be paired, that can be incorporated to
Speaker 4: the banking system. But we want to make sure that
Speaker 4: we don't end up with this kind of patchworky you know, disintermediated,
Speaker 4: disaggregated mess.
Speaker 1: Since you are the oldest banking regulator in the US,
Speaker 1: I want to ask you a little bit about the
Speaker 1: banking landscape post SVB, And one thing that it feels
Speaker 1: to me that regulators are still sort of grappling with
Speaker 1: is what they want the banking system to look like. Yes,
Speaker 1: do you want a sort of Canadian style system where
Speaker 1: you have like six megabanks and everyone banks with them
Speaker 1: and they're highly highly regulated. Or do you want the
Speaker 1: sort of vibrant, it's a wonderful life style banking system
Speaker 1: where there's local banks everywhere and everyone knows you, and
Speaker 1: you know your banker will personally extend you alone and
Speaker 1: things like that. Where does occ fall on that debate?
Speaker 2: Do you have a vision of what you want?
Speaker 4: I get this question a lot, and it's half a
Speaker 4: loaf of a question. And the reason I say that
Speaker 4: is because it's, just like you said, the instinct of
Speaker 4: folks who are asking you are who are contemplating this
Speaker 4: usually is to say there's too manyks, Like you know,
Speaker 4: four thousand is too many, what's the right number? Or
Speaker 4: to compare to other countries. And what it's missing is
Speaker 4: banks exist to serve people in communities in the economy.
Speaker 4: So what's missing from the question is, well, who are
Speaker 4: the people communities in the economy that we're trying to support.
Speaker 4: The US is very very different in Canada, right, We've
Speaker 4: got three hundred and thirty million people, We've got a
Speaker 4: very diverse economy, lots of different communities, and so that
Speaker 4: argues that we need to have an equally diverse banking system.
Speaker 4: So it's almost like, you know, regulators, we bank love
Speaker 4: to think in terms of ratios. So the question of
Speaker 4: like what should the banking system look like is the
Speaker 4: numerit the denominator is what the economy looks like. And
Speaker 4: as long as we have a really diverse economy, we
Speaker 4: need a really diverse banking system because one size doesn't
Speaker 4: fit all, Like the large megabanks can't serve don't want
Speaker 4: to serve all those different you know, I've got this
Speaker 4: debate yesterday with one of the participments about this long
Speaker 4: tail of cases in the US economy. We have a
Speaker 4: very long tail of different communities, whether they're geographic or otherwise,
Speaker 4: and I think those are opportunities for banking. So then
Speaker 4: the question is like what is the best way to
Speaker 4: meet and empower all of them? That to me, that's
Speaker 4: the real central question of merger policy. How do we
Speaker 4: set up merger policy so that we're approving, we're considering
Speaker 4: mergers that empower those communities.
Speaker 1: Oh yes, so I believe there was some discussion of
Speaker 1: updating the Merger Guidance post SVB to sort of get
Speaker 1: at this question.
Speaker 2: Is that still on the table.
Speaker 4: Yes, absolutely, it's on the table and it's taking some time,
Speaker 4: but it's because we want and we need to put
Speaker 4: people communities at the center of that analysis. You know,
Speaker 4: we've got statutory factors. We're kind of working through that,
Speaker 4: and there's a lot of detail around that. But as
Speaker 4: long as we have that long tail and as long
Speaker 4: as the US economy keeps growing, you know, the banking
Speaker 4: system has to grow with the US economy. So if
Speaker 4: you were to just graph US GDP and the side
Speaker 4: of the banking system, they pretty much match on top
Speaker 4: of each other. So as long as the US economy
Speaker 4: keeps growing and different parts of the economy grow, we
Speaker 4: want and need the banking system to grow with that.
Speaker 4: It's got to be safe, sound unfair. And this is
Speaker 4: why I spend so much time on large banks, because
Speaker 4: there are going to be more and more complex large
Speaker 4: banks in the future. They need to be resilient, they
Speaker 4: need to be resolvable and they need to be manageable,
Speaker 4: and so we spend a lot of time like, let's
Speaker 4: articulate that so we don't get back into the pre
Speaker 4: two thousand and eight pickle where you've got large banks
Speaker 4: that are not either resilient, resolvable, or manageable. That's not
Speaker 4: a place that we can afford to be.
Speaker 1: So, since we're talking sort of existential questions for the
Speaker 1: US banking landscape, one of the things that's been on
Speaker 1: my mind, especially in the context of fintech and I
Speaker 1: guess payments, innovation and things like that, there is still
Speaker 1: a difference in the US between commerce and banking, and
Speaker 1: it's sort of like never the Twain show me. Every
Speaker 1: once in a while there's a rumor that like Walmart
Speaker 1: wants to start a bank or something, and then it
Speaker 1: gets shot down because it's not allowed in the US.
Speaker 1: But I kind of wonder, you know, post SVB, as
Speaker 1: banks continue to be disrupted by new digital technology, there
Speaker 1: are digital bank runs nowadays and things like that, would
Speaker 1: there be room for a bank of Apple, for instance,
Speaker 1: or a bank of Amazon, or even a bank of
Speaker 1: Berkshire Hathaway.
Speaker 2: I know it's not a tech company, but.
Speaker 1: You know, these are companies with huge amounts of money.
Speaker 1: Maybe it would be nice to have a really well
Speaker 1: capitalized bank as interest rates are going up.
Speaker 4: So this is probably you need an entire other podcast
Speaker 4: to talk about this. It's a fascinating question. The history
Speaker 4: of the blending of banking and commerce is not a
Speaker 4: good one. In generally the history.
Speaker 1: Is wasn't Well's Fargo as stagecoach operation that seemed to
Speaker 1: work out?
Speaker 2: Okay?
Speaker 4: Where we have I mean, if you go back to
Speaker 4: two thousand and eight.
Speaker 2: Right, like you'd say, like the facetious but you're right, But.
Speaker 4: There we have lots and lots of examples where we said, hey,
Speaker 4: wouldn't it be great if we took these things and
Speaker 4: like you take the best of each and it's like,
Speaker 4: you know, the chocolate and the peanut buttery, you put
Speaker 4: them together and we get something better. And in almost
Speaker 4: every single case I can think of, it's ended quite badly.
Speaker 4: And there's two problems that are associated with that which
Speaker 4: we really have to be careful of. One is there
Speaker 4: does become an unusually high concentration of power market power,
Speaker 4: because they reinforce, the banking and the commerce reinforce each
Speaker 4: other in the way that's quite unfair and that can
Speaker 4: have you know, a lot of negative impacts. So that's
Speaker 4: one thing to be attentive to. And the other is
Speaker 4: the opportunities for problems go up because now how commerce
Speaker 4: goes impacts banking. And again that's not a safety and
Speaker 4: sound that's that's outside of the zone of how safety
Speaker 4: and sound is a supervision a typical thing goes. So
Speaker 4: that's that's why we've had this separation. I do think today,
Speaker 4: going forward, this is going to become a bigger and
Speaker 4: bigger question to deal with because payments by itself is commerce.
Speaker 4: When you start to put it next to things that
Speaker 4: are adjacent to payments, lending, credit deposits, savings, et cetera,
Speaker 4: that's banking, and this is this is a very fluid
Speaker 4: you know, rarely does the payments company say we're just
Speaker 4: going to do payments and that's all we're gonna do forever.
Speaker 4: At some point they say, hey, wouldn't it be great
Speaker 4: if we just did a little bit of you know,
Speaker 4: paid a little bit of yield on this on this
Speaker 4: cash that's sitting with us. Wouldn't be great we did
Speaker 4: did some lending.
Speaker 1: It's a slippery slope to being a bank. Yes, happened
Speaker 1: to everyone.
Speaker 4: Yes, and so we want to be really really attentive
Speaker 4: to that. And look, if there's a way to do
Speaker 4: it that's going to be safe, sound and unfair without
Speaker 4: financial stability concerns, I'm open, like, let's talk about that.
Speaker 4: But history has proven that that's.
Speaker 1: That's tough to do, all right, Michael Sue, thank you
Speaker 1: so much for coming on atholet's really appreciate it.
Speaker 4: Thanks so much for having me.
Speaker 1: All right, Well, that was the live conversation recorded at
Speaker 1: Money twenty twenty with the OCCS. Michael Sue, Joe, do
Speaker 1: you regret not going Tracy?
Speaker 3: You're so capable as a host, That is my conclusion.
Speaker 3: You're so capable as a host you don't even need me.
Speaker 3: And I think next year we're going to be sending
Speaker 3: you on the road for a lot of solo trips
Speaker 3: and I'll just hang back in.
Speaker 1: Tweet you flatter me to make yourself feel less guilty.
Speaker 2: But that's okay.
Speaker 1: I thought it was a super interesting conversation. Michael's a
Speaker 1: big All Thoughts fan, which was kind of fun, and
Speaker 1: maybe we inspired him with the supply chain analogy.
Speaker 2: I hope so me too.
Speaker 4: I love it all right?
Speaker 2: Shall we leave it there?
Speaker 3: Let's leave it there.
Speaker 1: This has been another episode of the All Thoughts podcast.
Speaker 1: I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 3: And I'm Joe Wisenthal. You can follow me at The Stalwart.
Speaker 3: Follow our producer Carman Rodriguez at Carman armand dash Ol
Speaker 3: Bennett at Dashbot and kel Brooks at kel Brooks. And
Speaker 3: thank you to our producer Moses Ondam. From our Odlots content,
Speaker 3: go to bloomberg dot com slash odd Lots, where we
Speaker 3: have a blog, a transcript, and a weekly newsletter that
Speaker 3: comes out every Friday. And check out the Odlogs Discord
Speaker 3: Discord dot gg, slash odd Logs chat with fellow listeners
Speaker 3: twenty four to seven.
Speaker 1: And if you enjoy odd Lots, if you want us
Speaker 1: both to go back to Las Vegas at some point,
Speaker 1: then please leave us a positive review on your favorite
Speaker 1: podcast platform.
Speaker 2: Thanks for listening.