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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.

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Speaker 2: Hello and welcome to another episode of the ad Blots podcast.

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Speaker 2: I'm Tracy Alloway.

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Speaker 3: And I'm Joe.

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Speaker 4: Why isn't thal Joe?

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Speaker 2: Do you remember what we were doing this time last year?

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Speaker 5: Uh?

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Speaker 4: Nope, not really.

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Speaker 2: I should say around this time last year. But yes,

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Speaker 2: I can't really even remember last week at this point.

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Speaker 2: But in the middle of January we recorded an episode

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Speaker 2: on the discount Yeah.

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Speaker 5: Oh, on the discount window, Yes, I do. Why were

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Speaker 5: we talking about the discount window?

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Speaker 2: No, because borrowing was going up, right, Yes? Yeah?

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Speaker 6: Right?

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Speaker 5: Yes, okay, yes, so in like February or Sunday or

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Speaker 5: maybe early January of last year. No, no, February March

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Speaker 5: of last year. Like, we did that episode about like

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Speaker 5: deposit rates, and then that turned out to be very relevant.

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Speaker 5: But even before that, you started writing about the rise

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Speaker 5: in discount window borrowing.

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Speaker 2: Yes, that's right. I think I wrote something in December.

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Speaker 2: I think the headline was like billions in discount window

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Speaker 2: borrowing suggests all is not well with banks, which turned

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Speaker 2: out to be fairly true come March because we did

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Speaker 2: see a mini banking crisis, banking drama, whatever you want

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Speaker 2: to call it the collapse of three banks, including Silicon

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Speaker 2: Valley Bank. But since then there has been this massive

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Speaker 2: discussion about how to tweak all these emergency financing programs

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Speaker 2: for banks, what they should actually look like, how do

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Speaker 2: we want the lender of last resort system to operate,

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Speaker 2: and what does it mean for banks? You know, if

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Speaker 2: they have to hold back additional collateral in order to

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Speaker 2: access these programs, then what does it mean for them

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Speaker 2: from you know, a capital or a revenue to point.

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Speaker 2: So many things going on in the space right now.

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Speaker 2: It's a little bit under the radar, but I think

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Speaker 2: we should talk about it totally.

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Speaker 5: It always is like there's like this inherent challenge, right

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Speaker 5: and even with Silicon Valley Bank, even setting aside like

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Speaker 5: emergency borrowing. You know, the thing I guess like that

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Speaker 5: people get anxious about is as soon as any financial

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Speaker 5: institution makes moves to shore up liquidity, show up finances,

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Speaker 5: et cetera, that becomes a signal right to investors or

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Speaker 5: depositors whoever, it's like, Okay, why do they feel the

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Speaker 5: need to shore up their finances? And then you become

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Speaker 5: a target and you start worry about the share price

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Speaker 5: and equity et cetera. And it feels like this is

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Speaker 5: like an inherent challenge for regulators, which is, of course,

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Speaker 5: you want banks to be proactive, you want banks to

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Speaker 5: have plenty of liquidity, you want them to have equity cushions.

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Speaker 5: But if the act of doing so invites suspicions, then

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Speaker 5: how do you get.

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Speaker 4: Out of that puzzle?

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Speaker 2: Well, exactly, And I think this is most apparent with

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Speaker 2: the discount window, where people talk about the stigma of

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Speaker 2: accessing the discunt window, and you know, when you access it,

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Speaker 2: it's supposed to be anonymous. The FED doesn't publish who's

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Speaker 2: actually tapping it until I think two years later. But

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Speaker 2: you start to see rumors swirl. In the case of

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Speaker 2: last year, when we saw the discount window borrowing start

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Speaker 2: to go up in December, I think that was the

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Speaker 2: proximate time when people started to ask questions about like, well,

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Speaker 2: wait a second, what's going on with Signature, what's going

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Speaker 2: on with Silicon Valley Bank. That might have contributed to

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Speaker 2: some of the deposit withdrawals that we eventually saw. So

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Speaker 2: the super interesting thing now is that people are talking

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Speaker 2: about reforming the discount window as well as some other facilities.

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Speaker 2: We saw the acting Comptroller of the Currency Michael Sue,

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Speaker 2: also a former All Blots guest, talk about the idea

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Speaker 2: of like, well, maybe we're going to require banks to

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Speaker 2: tap the discount window every once in a while, just

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Speaker 2: so the stigma maybe reduces, but also they have the

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Speaker 2: operational readiness to do it when they really need to.

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Speaker 5: Can I say it's almost inappropriate? For no, it's it's

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Speaker 5: it's borderline.

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Speaker 2: Are you gonna make the discount window inappropriate? I'm curious?

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Speaker 5: So you know what I think whenever, like I hear

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Speaker 5: this idea of like, well, if you just get everyone

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Speaker 5: to do it, there's no there's no stock.

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Speaker 2: Oh, I know exactly what you're gonna say.

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Speaker 4: I tweeted this one.

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Speaker 5: I always think about the scene in the movie Billy

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Speaker 5: Madison where like the kid is really embarrassed because everyone

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Speaker 5: can see that he pat his pants and so wait,

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Speaker 5: who's that actor who's in it?

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Speaker 4: That fit the comedian Adam Sandler.

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Speaker 5: Adam Sandler's like, oh, he like splashes a bunch of

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Speaker 5: water on his own pants, and so he's like, oh,

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Speaker 5: everyone and everyone around has water on their own pants.

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Speaker 5: There's nothing embarrassing about it. And in my mind that's

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Speaker 5: I'm Sorry, maybe I have a juvenile humor. That's always

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Speaker 5: where my mind goes. If you have everyone do it,

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Speaker 5: no one can be embarrassed about doing it.

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Speaker 2: Okay, Well, on today's episode, why requiring banks to tap

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Speaker 2: the discount window is the equivalent of splashing your pants

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Speaker 2: with water?

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Speaker 4: That's gonna be the title of this episode.

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Speaker 2: Excellent. We really do have the perfect guest. It's someone

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Speaker 2: we've wanted to get on the podcast for a long time,

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Speaker 2: and I don't think he's been on before.

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Speaker 3: Though.

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Speaker 2: We're going to be speaking with Stephen Kelly, Associate director

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Speaker 2: of Research at the Yale Program on Financial Stability. So, Steven,

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Speaker 2: thank you so much for coming on all.

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Speaker 6: Thoughts, happy to be here and talk about Billy Madison.

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Speaker 2: So how much did the banking drama of last year

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Speaker 2: change attitudes towards emergency lending facilities? I guess another way

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Speaker 2: of asking the question is do we think that all

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Speaker 2: these lender of last resort type things actually stood up

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Speaker 2: to the test last year?

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Speaker 6: Yeah? So it's a tricky question because obviously what comes

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Speaker 6: after these crises is you go, why didn't it work? Right?

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Speaker 6: It's there, the Fed can mint money. Why doesn't it work?

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Speaker 6: You know? Why didn't SVB just post everything at the window.

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Speaker 6: And we can get into the various reasons about that,

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Speaker 6: but basically it's hopeless to say, oh, the discount window

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Speaker 6: is going to work once you have name that's in

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Speaker 6: the headlines, and that's sort of the pressure we put

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Speaker 6: on it. Sometimes what the discount window is great for

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Speaker 6: is sort of a macro story. It's great for contagion.

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Speaker 6: It's great for maybe a community bank that it isn't

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Speaker 6: facing the same kind of headline risks. It's never gonna

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Speaker 6: save that bank that's in the headlines, and we can

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Speaker 6: go into all the reasons about why, but so much

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Speaker 6: of the franchise value just gets destroyed so fast. And

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Speaker 6: when you're talking about replacing all your depositors, well, what

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Speaker 6: is a bank but you know a collection of its depositors.

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Speaker 6: So you know, you can put all the money you

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Speaker 6: want in the window, but it's never gonna save that bank.

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Speaker 6: And that's just too much pressure on the window.

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Speaker 5: Can good banks fail by taking on these counter signals

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Speaker 5: to the market, So, whether it's going to the FED

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Speaker 5: and trying to get additional liquidity, whether it's doing an

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Speaker 5: equity sale at some point just to create that greater

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Speaker 5: equity cushion. If the bank is fundamentally sound, can simply

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Speaker 5: expressing consarn be enough to bring it down because it

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Speaker 5: does seem like, you know, people don't want to send

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Speaker 5: that signals. Or ultimately, if the bank is good, then

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Speaker 5: these are good moves to take and they'll survive it.

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Speaker 6: Yeah. The biggest thing is if you can't get capital.

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Speaker 6: I mean capital is what protects the deposit layer of

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Speaker 6: the balance sheet. So if you can't get capital as

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Speaker 6: a bank, you're out of business. So SVB comes out

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Speaker 6: March eighth last year with an eight K that says, oh,

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Speaker 6: you know, we were kind of looking at raising two

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Speaker 6: point twenty five billion. We have five hundred million of commitment.

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Speaker 6: Like that was enough to say, Okay, they gave an

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Speaker 6: inside look at the balance sheet and nobody wanted it.

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Speaker 5: So it wasn't that they were raising capital. It was

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Speaker 5: that they announced that there was this gap.

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Speaker 6: Yeah, if they had come out on March eight and

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Speaker 6: said Warren Buffett is investing two point five billion, we

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Speaker 6: would still have SVB today, got it.

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Speaker 2: Maybe this is a good place to sort of back

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Speaker 2: up and dive into what exactly happened with SVB. So

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Speaker 2: there seems to have been a reluctance or an inability

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Speaker 2: to tap the discount window soon enough. But we also

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Speaker 2: know in retrospect, with the benefit of hindsight, that they

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Speaker 2: were tapping another emergency. Well, oh, I should be careful here.

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Speaker 2: It's not really supposed to be an emergency lending facility.

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Speaker 2: I'm talking about the fhlb's, the Federal Home Loan banks.

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Speaker 2: We used to call these, by the way, we used

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Speaker 2: to joke in like two thousand and nine that fhlb

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Speaker 2: stood for free Hubris loans for banks or find huge

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Speaker 2: lumps of bucks.

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Speaker 4: Like I love to find huge lumps of bucks.

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Speaker 2: But anyway, I mean, this is a facility. It was

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Speaker 2: supposed to facilitate home ownership and help banks do mortgages

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Speaker 2: for people, but it sort of transformed to become an

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Speaker 2: alternate emergency lending facility, and we should definitely talk about why.

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Speaker 2: But SVB was basically tapping that instead of the discount window.

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Speaker 2: So walk us through like what we saw from that

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Speaker 2: particular bank in terms of the choices they made to

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Speaker 2: access different types of liquidity.

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Speaker 6: Yeah, so we call the fhlb's the flubs, which they

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Speaker 6: don't love, but we'll deal it anyways, So I think

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Speaker 6: it's not unique to SVB that they sort of relied

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Speaker 6: on the fhlbs. You know, there was an SNL sketch

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Speaker 6: after two thousand and eight during the original stress test

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Speaker 6: where they they sort of did a bit like the

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Speaker 6: stress test was an actual exam that banks had to take,

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Speaker 6: and you know, City Group kept answering government bailout to

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Speaker 6: all the questions and that's never saw that. That's sort

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Speaker 6: of what happened with the fhlbs, particularly prior to March

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Speaker 6: and prior to you know, the supervisory pressure we've seen

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Speaker 6: since where if you asked the bank, hey, what do

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Speaker 6: you do if you really get pinched to go, well,

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Speaker 6: we'll go to the FLUB. You know, we have a

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Speaker 6: great relationship with the fhlbs. I mean that's another piece

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Speaker 6: is that these fhlbs are a lot more commercial in

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Speaker 6: nature than the FED. But so that was sort of

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Speaker 6: the contingency funding plan written large across the system, and

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Speaker 6: you know, it sort of works if you need a

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Speaker 6: billion or five billion if you're SVB. It doesn't work

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Speaker 6: if you need forty billion because the fhlb's they take

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Speaker 6: government collateral, they take mortgage collateral. If you need to

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Speaker 6: start posting, you know, commercial and industrial loans, something like

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Speaker 6: corporate bonds. You got to go to the FED. And

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Speaker 6: if you're not set up at the FED, because it's

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Speaker 6: annoying to do that, it's too expensive, you don't want

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Speaker 6: to leave collateral there, whatever the reason, you run out

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Speaker 6: of time.

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Speaker 5: So some things just aren't set up with the FED,

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Speaker 5: like it's too annoying.

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Speaker 2: Exactly what if that's the operational readiness argument for making

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Speaker 2: them splash water on their pants, slash go to the

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Speaker 2: discount window.

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Speaker 6: Right, So SPB literally couldn't get collateral to the FED

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Speaker 6: in time before the run is out. Again, the SVB

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Speaker 6: story was over, so it didn't matter. But it's useful

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Speaker 6: to be ready to go at the FED because they

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Speaker 6: can take effectively your whole balance sheet. Basically any asset

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Speaker 6: a bank will have you can put to the window.

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Speaker 6: I mean, that's why it exists. And the FHLBS, you know,

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Speaker 6: because of this sort of housing origin and whatever other reasons,

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Speaker 6: they just don't have that range.

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Speaker 2: The same thing happened at Signature, by the way, and

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Speaker 2: I think there was a really good speech by a

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Speaker 2: FED official. I can't remember who it was, but they

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Speaker 2: were talking about how it had basically been five years

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Speaker 2: since Signature tapped the discount window, and when it came

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Speaker 2: time to tap again, you know, things are blowing up.

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Speaker 2: You need to access emergency liquidity. The Signature staff didn't

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Speaker 2: really understand the rules around collateral eligibility and what they

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Speaker 2: had to do in order to actually go to the

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Speaker 2: window and borrow money. So I can see the argument

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Speaker 2: for why you would want people to like practice it.

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Speaker 5: Hey, what happened to Signature who took over their assets again? Well,

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Speaker 5: I'm making a bit of a joke there that I'm

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Speaker 5: aware that.

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Speaker 6: I'll have to check my Bloomberg. I think there's some

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Speaker 6: sleepy bank. No one's ever heard of it.

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Speaker 5: Yeah, and why c b Okay, So no, this really,

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Speaker 5: I mean that sort of blew my mind at the time,

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Speaker 5: that like, here are these institutions, and I guess that weekend, obviously,

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Speaker 5: I guess the Fed or the Treasury determined that there

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Speaker 5: was some sort of emergency aspect of it. And we

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Speaker 5: all know that, like there was the sort of rescue

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Speaker 5: and they opened up this new program, the BTFP, which

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Speaker 5: we'll talk about. But it sort of blew my mind

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Speaker 5: that you could have this crisis and part of it

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Speaker 5: is like, well, what time is it? What time is

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Speaker 5: like the window actually open? Can we reopen the window?

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Speaker 5: Like that sort of blew my mind. So what happened

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Speaker 5: immediately or maybe not immediately, but in the wake of

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Speaker 5: all of this. So we've sort of talked about the

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Speaker 5: run up and how they're like, what changes did we

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Speaker 5: see regulatory wise in the wake of the SVB and

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Speaker 5: signature disaster.

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Speaker 6: So the biggest change, which is long overdue, is you

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Speaker 6: got to post more collateral at the window. It's this

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Speaker 6: term prepositioning that we're starting to hear more and more of.

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Speaker 6: And you know, you got to practice, and we're hearing

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Speaker 6: more from regulators that they would like a little more

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Speaker 6: practice than this, you know, and this is probably the

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Speaker 6: direction that supervision needs to go of, like, Hey, if

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Speaker 6: you're not practicing, we're gonna we're gonna docu. If you

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Speaker 6: can't show that you can show up at the window

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Speaker 6: and get liquidity when you need it, we're going to

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Speaker 6: docu from a supervisory perspective. But really, it's been a

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Speaker 6: lot of pressure to send more collateral to the FED.

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Speaker 6: There is something like three trillion dollars of collateral at

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Speaker 6: the FED. We don't get like daily updates on this,

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Speaker 6: but it's in that vicinity and we know what's been growing.

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Speaker 6: And we're also hearing from regulators that there's maybe some

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Speaker 6: reforms to be had and some new liquidity measures to take.

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Speaker 2: Is pre positioning a synonym basically for encumbrance. So the

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Speaker 2: idea that I have a certain number of assets on

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Speaker 2: my balance sheet, I'm going to have to use more

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Speaker 2: of those or set more of those aside at the

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Speaker 2: Central Bank in order to satisfy these new requirements, and

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Speaker 2: therefore they're going to be less available to me to

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Speaker 2: do stuff, do you know, creative and hopefully revenue generating

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Speaker 2: things with them, like repo them out or something like that.

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Speaker 6: So yes, that's that's part of the story. And the

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Speaker 6: other thing I think about is like banks have a

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Speaker 6: lot of loans, so those are just sitting there, goes

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Speaker 6: to the FED. You get over the hurdles of moving up,

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Speaker 6: Like it's not like you're repolling out your loans necessarily

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Speaker 6: as a community bank. Just house them at the FED,

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Speaker 6: don't leave them at the fhlb's send them to the FED.

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Speaker 6: And so that's gonna be a piece of it. The

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Speaker 6: other thing that may come here is some sort of

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Speaker 6: carrot with that stick. So the hardest thing about the

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Speaker 6: discount window is that it really can't be any cheaper.

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Speaker 6: And that's the stigma, is that it's really expensive. So

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Speaker 6: if you have a deposit which is yielding zero and

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Speaker 6: you've got to go to the window, the Fed can say, oh,

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Speaker 6: look it's just the top of the Fed funds rate,

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Speaker 6: but that's still you know, right now, it's five hundred

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Speaker 6: BIPs more than more than deposit.

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Speaker 4: I see.

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Speaker 5: So even if it's just like it's just you're just borrowing,

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Speaker 5: even if it's just at the Fed funds raids, yeah,

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Speaker 5: like really banks are borrowing from their deposits. That's way

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Speaker 5: more or you know, whatever it is now it's not

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Speaker 5: zero anymore, but whatever the typical deposit is.

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Speaker 6: Right, So it's it's incredibly expensive. It would be great

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Speaker 6: if you were Coca Cola and you could go to

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Speaker 6: the discount window, but you can't. So the way to

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Speaker 6: destigmatize is to offer some sort of caret and if

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Speaker 6: you can say, hey, if you preposition collateral, we'll give

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Speaker 6: you some credit towards your LCR, or we'll give you

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Speaker 6: some credit towards these other things. So you can self

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Speaker 6: ensure less and do more profitable things with your balance sheet.

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Speaker 6: That's maybe a viable route, and that's why preposition is

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Speaker 6: sort of coming in vogue.

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Speaker 2: Wait, can you talk a little bit more about the

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Speaker 2: rates available at I guess specifically the discount window versus

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Speaker 2: the Fhlb's ye, because this is something I never like

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Speaker 2: quite understood. So if you go to the FHLB the FLUB,

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Speaker 2: I think they actually like they do something where they

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Speaker 2: do look at unrealized gains and losses on your securities

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Speaker 2: in order to see whether or not you're a viable

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Speaker 2: entity to be lending money too. So if you are

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Speaker 2: like super stressed, they might not actually lend you money.

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Speaker 2: But on the other hand, it seems like everyone kept

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Speaker 2: going to them, and I'm assuming it's because like the

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Speaker 2: rate of borrowing is more attractive than the discount rate.

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Speaker 6: Yeah, so that's a big piece of it. And it's

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Speaker 6: the confidentiality. So the valuation thing you're thinking of is

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Speaker 6: only unavailable for sales. So that's part of the story

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Speaker 6: is you can still hide the losses and help the

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Speaker 6: maturity to some degree, but the pricing is definitely advantageous

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Speaker 6: and nobody can write that story that you wrote last February, Tracy,

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Speaker 6: where you're saying, okay, it looks like.

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Speaker 2: There's December, please sorry, give me my extra two months.

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Speaker 6: I think you told these banks to borrow. You know,

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Speaker 6: nobody can write that story because the data is not

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Speaker 6: it's not public data. We don't get a weekly balanced

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Speaker 6: sheet from the Fed.

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Speaker 4: Why isn't it public.

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Speaker 1: Because you don't want to run on the bank.

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Speaker 6: Because the fhlb's are a private entity, they're cooperative basically

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Speaker 6: put together by the banks, and so that's a piece

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Speaker 6: of the stigma. And the funding is really good because

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Speaker 6: this is you know, it's a GSC, it's a government

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Speaker 6: sponsored enterprise. So when you have a crisis and there's

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Speaker 6: a flight into money market government money market funds, what

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Speaker 6: can they buy? They can buy treasuries and they can

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Speaker 6: buy FHLB debt and so you really have you have

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Speaker 6: cheap issuance. And the FHLB pays out their earnings to members.

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Speaker 6: They don't pay it out based on you know, the

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Speaker 6: biggest bank it's the biggest or you know, everybody gets

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Speaker 6: an eqal share. Whoever borrows is who gets the earnings back.

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Speaker 6: So it's it's literally you know, a rebate to anybody

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Speaker 6: who borrows. And so what we see as the fhlbs

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Speaker 6: are always competitive with the FED, often cheaper, and you

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Speaker 6: know that drives part of the story too, is that

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Speaker 6: they just have this built in discount.

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Speaker 2: So one other thing that's happened recently is the FED

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Speaker 2: has basically said they're going to end the BTFP program,

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Speaker 2: I think in March, which was when it was supposed

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Speaker 2: to end. And I was kind of amazed at some

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Speaker 2: of the arbitrage story that came out a little while ago,

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Speaker 2: the idea that banks could basically get free money from

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Speaker 2: the FED because of the way the rates were set

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Speaker 2: on the BTFP versus other financing sources. How big of

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Speaker 2: an issue was that, How much did that play into

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Speaker 2: the decision to end it? And then I guess lastly,

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Speaker 2: given what we're seeing now with one particularler New York

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Speaker 2: based bank and the troubles, there is there a possibility

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Speaker 2: that the BTFP gets extended.

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Speaker 6: So I would say it's unlikely absent a wider crisis.

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Speaker 6: The arbitrage story isn't really it's not likely that that's

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Speaker 6: why it was ended. It was ended because things you know,

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Speaker 6: NYCB notwithstanding and things have been calmer. There's not really

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Speaker 6: the unusual and exigen circumstances the FED looks for. I

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Speaker 6: think it's probably why we found out in January that

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Speaker 6: it was going to end in March and why they

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Speaker 6: announced the rate change. Yeah. So the way the rate

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Speaker 6: thing worked is the BTFP is for one year. The

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Speaker 6: FED charged one year OIS plus ten basis points, So

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Speaker 6: that was sort of the penalty built in. But what

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Speaker 6: they're lending is reserves, and if you are a bank,

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Speaker 6: you can leave those reserves at the FED, not do

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Speaker 6: anything with them, and earn interest on reserves. So this

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Speaker 6: is sort of a new post two thousand and eight

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Speaker 6: thing that actually weighs into the expenses of the FED.

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Speaker 6: So when OIS plus ten BIPs drops below ior, you know,

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Speaker 6: you could just run that trade infinitely as long as

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Speaker 6: you have the collateral and just sort of harvest the

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Speaker 6: carry basically.

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Speaker 5: For listeners and for myself. Remind me again, so what

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Speaker 5: exactly the BTFP stipulated. It was rolled out as part

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Speaker 5: of the SVB emergency. I get, you know, there were

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Speaker 5: all these concerns about these losses on the whold to

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Speaker 5: market book, But remind me what the actual design of

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Speaker 5: that program was.

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Speaker 6: So the biggest thing about the BTFP is that it

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Speaker 6: took collateral at par value.

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Speaker 5: Right par and so there was a lot of these

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Speaker 5: treasuries in particularly in SVB cases were like way off

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Speaker 5: parwer because rates.

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Speaker 6: And China right. And so the critique at the time was, oh,

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Speaker 6: my gosh, this is not how central banking works. You

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Speaker 6: can't just lend it whatever value, blah blah blah. And

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Speaker 6: that was pretty overblown because the BTFP still charges a

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Speaker 6: market rate. So just like we were talking about before,

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Speaker 6: they're not charging the deposit rate. They're charging five hundred

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Speaker 6: BIPs at the time. So all it did was turn

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Speaker 6: out a bank's losses because you know, a mark to

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Speaker 6: market loss on a health to maturity security from interest

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Speaker 6: rates is representative of your funding cost over time to

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Speaker 6: hold that security. Banks typically don't pay that actual rate,

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Speaker 6: right if they're paying cheaper deposits, and that's why we

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Speaker 6: ignore the accounting. But once you take that security to

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Speaker 6: the FED, if you take a thirty year treasure to

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Speaker 6: the FED for thirty years, just keep rolling that discount

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Speaker 6: window alone, you're going to pay the market rate, and

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Speaker 6: so those losses are you're going to realize them over time.

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Speaker 6: So it solved the liquidity problem, but it didn't ignore

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Speaker 6: these losses. Banks still had to deal with them.

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Speaker 2: You just alluded to something that I wanted to ask you.

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Speaker 2: This is sort of a provocative question. I know it's

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Speaker 2: going to get you going. But liquidity versus solvency, that's

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Speaker 2: not even a question, that's just a statement. What's the difference?

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Speaker 2: Does it matter?

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Speaker 6: So this is a common versus framing for basically synonyms

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Speaker 6: in banking, Like every time a bank fails, it's either

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Speaker 6: one political party, it's definitely the executive who ran the bank.

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Speaker 6: We just had a liquidity problem. We just needed more

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Speaker 6: liquidity from the Fed. People freaked out. The question they

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Speaker 6: can answer is why your bank? Right? We don't have

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Speaker 6: a panic that takes down JP Morgan right. The idea

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Speaker 6: that something can be a liquidity issue alone, it doesn't exist.

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Speaker 6: These banks aren't chosen at random, and every bank at

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Speaker 6: the very end looks like a liquidity issue because the

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Speaker 6: last thing they do is either fail to make a

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Speaker 6: payment or look like they're about to fail to make

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Speaker 6: a payment and the regulators show up.

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Speaker 5: Well, can you have like a pure self fulfilling prophecy,

435
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Speaker 5: like couldn't someone start a false rumor or misunderstand social media.

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Speaker 5: And I remember in the wake of SVB as like, oh,

437
00:21:28,240 --> 00:21:31,120
Speaker 5: social media caused the bank run or all of these

438
00:21:31,160 --> 00:21:34,840
Speaker 5: people on his ski trip in Aspen, I think was

439
00:21:34,880 --> 00:21:36,280
Speaker 5: like one of the stories, like they were all like

440
00:21:36,440 --> 00:21:39,600
Speaker 5: whatsapping with each other and that's what caused the bank run.

441
00:21:39,680 --> 00:21:41,720
Speaker 5: Like could that is that a real thing? Like where

442
00:21:41,760 --> 00:21:44,480
Speaker 5: like a bank could go down? You say like, well, yeah,

443
00:21:44,480 --> 00:21:46,600
Speaker 5: but why are they targeting you? But maybe everyone just

444
00:21:46,640 --> 00:21:48,520
Speaker 5: on the WhatsApp group says this is the bank that's

445
00:21:48,520 --> 00:21:48,959
Speaker 5: in trouble.

446
00:21:49,600 --> 00:21:52,720
Speaker 6: They could, but we just don't see that as really happening.

447
00:21:53,119 --> 00:21:56,159
Speaker 6: You know, SVB was running on negative accounting equity for

448
00:21:56,280 --> 00:21:58,879
Speaker 6: months and investors had discounted it. It's not just the

449
00:21:58,960 --> 00:22:01,200
Speaker 6: SVB case, Like there has yet to be a case

450
00:22:01,240 --> 00:22:04,560
Speaker 6: study where Twitter can come out or you know, Bill

451
00:22:04,560 --> 00:22:07,439
Speaker 6: Ackman can just like take down Goldman Sachs. Because it

452
00:22:07,480 --> 00:22:10,200
Speaker 6: goes back to what we're saying about Warren Buffett or

453
00:22:10,200 --> 00:22:13,080
Speaker 6: the capital raise. It if the franchise is strong and

454
00:22:13,160 --> 00:22:15,959
Speaker 6: you have if you have contingent capital, you don't have

455
00:22:16,000 --> 00:22:18,760
Speaker 6: to worry. If you don't have contingent capital, the capital

456
00:22:18,840 --> 00:22:19,720
Speaker 6: structure breaks down.

457
00:22:20,200 --> 00:22:22,760
Speaker 5: This is the thing Tracy that I still like to

458
00:22:22,800 --> 00:22:26,000
Speaker 5: this day, I don't quite understand, which is that, you know,

459
00:22:26,040 --> 00:22:28,520
Speaker 5: there was no question that they were running like negative

460
00:22:28,640 --> 00:22:31,240
Speaker 5: equity and was right there in like probably the ten

461
00:22:31,320 --> 00:22:35,040
Speaker 5: Q or like some SEC filing. But you know, like

462
00:22:35,160 --> 00:22:38,600
Speaker 5: all of these startups like supposedly loved the bank they targeted.

463
00:22:38,680 --> 00:22:41,280
Speaker 5: They understood they had like these special products so that

464
00:22:41,640 --> 00:22:44,920
Speaker 5: founders could get mortgages by posting their RSUs as collateral,

465
00:22:44,960 --> 00:22:47,680
Speaker 5: which other banks didn't like. I don't understand why they

466
00:22:47,680 --> 00:22:52,000
Speaker 5: couldn't have monetized that franchise value, which now seems to

467
00:22:52,040 --> 00:22:52,480
Speaker 5: be gone.

468
00:22:52,560 --> 00:22:54,280
Speaker 6: So they did for so long. I mean, that's how

469
00:22:54,320 --> 00:22:58,760
Speaker 6: they could afford running at negative accounting equity. It's like Amazon, right,

470
00:22:58,800 --> 00:23:00,600
Speaker 6: how long did they take to turn profit? But you

471
00:23:00,720 --> 00:23:05,439
Speaker 6: had long term viability. And the thing with SVB is like, Okay,

472
00:23:05,480 --> 00:23:09,080
Speaker 6: you can have the mostest loyalist depositors in the world,

473
00:23:09,160 --> 00:23:12,200
Speaker 6: like every bank thinks they have, and SVB probably did.

474
00:23:12,840 --> 00:23:16,040
Speaker 6: But what happened, you know what Tracy was observing with

475
00:23:16,080 --> 00:23:19,959
Speaker 6: her article and what was happening before the run is

476
00:23:20,440 --> 00:23:23,760
Speaker 6: they had to spend their money. Like the deposit balance

477
00:23:23,840 --> 00:23:27,000
Speaker 6: at SVV was dependent on new IPOs that just weren't happening.

478
00:23:27,040 --> 00:23:29,879
Speaker 6: So these venture capitalists are as loyal as can be,

479
00:23:29,920 --> 00:23:32,399
Speaker 6: but they're just spending down their cash balances, and so

480
00:23:32,600 --> 00:23:33,320
Speaker 6: the balance sheet.

481
00:23:33,240 --> 00:23:37,080
Speaker 2: Unlines how much of the banking fragility that we've seen

482
00:23:37,119 --> 00:23:40,320
Speaker 2: over the past year is basically an interest rate story.

483
00:23:40,440 --> 00:23:44,200
Speaker 2: So you know, setting aside IPOs which dried up when

484
00:23:44,240 --> 00:23:47,520
Speaker 2: interest rates increased, you also just have the losses on

485
00:23:47,600 --> 00:23:50,480
Speaker 2: the bond portfolio. And to me, this is kind of

486
00:23:51,320 --> 00:23:53,600
Speaker 2: it's kind of a non issue, but it's also kind

487
00:23:53,640 --> 00:23:56,720
Speaker 2: of a fundamental tension in the banking system, which is

488
00:23:56,720 --> 00:24:00,399
Speaker 2: that you've built all the rules around the idea that,

489
00:24:00,480 --> 00:24:03,760
Speaker 2: like the best type of collateral is either cash or

490
00:24:03,840 --> 00:24:07,399
Speaker 2: government bonds, which is fine when government bonds are really

491
00:24:07,440 --> 00:24:10,520
Speaker 2: boring and not very volatile and there's not a lot happening.

492
00:24:10,760 --> 00:24:13,560
Speaker 2: But when inflation starts to go up and the primary

493
00:24:13,640 --> 00:24:17,080
Speaker 2: tool the central bank has to manage that is to

494
00:24:17,240 --> 00:24:20,920
Speaker 2: affect the price of bonds, then we seem to have

495
00:24:21,000 --> 00:24:23,520
Speaker 2: this like tension enter the system.

496
00:24:24,000 --> 00:24:25,879
Speaker 6: For sure. That's how you end up with the BTFP,

497
00:24:26,320 --> 00:24:29,960
Speaker 6: which you know sort of fits in this long trend,

498
00:24:30,040 --> 00:24:33,360
Speaker 6: particularly the FED of like what is a treasury and

499
00:24:33,520 --> 00:24:35,920
Speaker 6: how much do we want to monetize it, Like how

500
00:24:35,960 --> 00:24:38,080
Speaker 6: often do we want to be intervening? How you know,

501
00:24:38,160 --> 00:24:40,159
Speaker 6: what different lending facilities do we have to set up?

502
00:24:40,200 --> 00:24:42,560
Speaker 6: Who do we let? So it does sort of sit

503
00:24:42,600 --> 00:24:45,239
Speaker 6: within that post two thousand and eight tension of like,

504
00:24:46,160 --> 00:24:48,919
Speaker 6: you know, we're really building the system on top of

505
00:24:48,960 --> 00:24:50,720
Speaker 6: these safe assets, so we kind of have to keep

506
00:24:50,760 --> 00:24:53,840
Speaker 6: them money. Like, but yeah, that is the key vulnerability.

507
00:24:53,880 --> 00:24:56,240
Speaker 6: But also there's so many banks who have that same

508
00:24:56,280 --> 00:24:59,200
Speaker 6: vulnerability as su that didn't fail. So that's sort of

509
00:24:59,240 --> 00:25:02,240
Speaker 6: the built in macro vulnerability. But the interest rate risk,

510
00:25:02,800 --> 00:25:05,639
Speaker 6: you know, was also in tech and in innovation and

511
00:25:05,640 --> 00:25:08,879
Speaker 6: in crypto and so that's why we've seen like banks

512
00:25:08,920 --> 00:25:12,040
Speaker 6: like Schwab, banks like Bank of America, like huge unrealized losses,

513
00:25:12,280 --> 00:25:14,400
Speaker 6: but less concerned about the franchise.

514
00:25:14,680 --> 00:25:17,800
Speaker 2: Yeah, it seems like when I say non issue, like

515
00:25:17,840 --> 00:25:19,960
Speaker 2: it seems like there's a tension. But also I find

516
00:25:19,960 --> 00:25:22,480
Speaker 2: it hard to believe that like the banking system is

517
00:25:22,520 --> 00:25:25,200
Speaker 2: going to come down because banks have bought too many

518
00:25:25,320 --> 00:25:28,520
Speaker 2: US treasuries, Like that doesn't seem right, and this doesn't

519
00:25:28,520 --> 00:25:29,200
Speaker 2: seem realistic.

520
00:25:29,200 --> 00:25:31,200
Speaker 6: This was always the nuclear option that the FED had

521
00:25:31,320 --> 00:25:33,600
Speaker 6: is like, the second you're worried about JP Morgan going

522
00:25:33,640 --> 00:25:35,960
Speaker 6: down because of too many treasuries, the Fed's going to

523
00:25:36,000 --> 00:25:38,960
Speaker 6: cut rates and just recapitalize the whole system. So it

524
00:25:39,080 --> 00:25:41,959
Speaker 6: was also sitting in this tension of the FED was

525
00:25:42,000 --> 00:25:44,879
Speaker 6: tightening and didn't want to ease up on tightening, So

526
00:25:45,000 --> 00:26:00,520
Speaker 6: that made it a harder dance too.

527
00:26:01,960 --> 00:26:04,080
Speaker 5: You wrote about this a little bit at this time,

528
00:26:04,280 --> 00:26:09,200
Speaker 5: and I think, even like before SVB, what happened if

529
00:26:09,280 --> 00:26:11,879
Speaker 5: we get into this situation in which the FED is

530
00:26:11,920 --> 00:26:14,920
Speaker 5: trying to put out a financial fire at the same

531
00:26:15,000 --> 00:26:17,399
Speaker 5: time that it's trying to fight inflation, which was certainly

532
00:26:17,440 --> 00:26:19,600
Speaker 5: the case in March twenty twenty three because at that

533
00:26:19,720 --> 00:26:23,320
Speaker 5: point the hiking cycle had not yet reached its peak,

534
00:26:23,359 --> 00:26:25,760
Speaker 5: and so the you know, they re expanded the balance sheet.

535
00:26:25,960 --> 00:26:28,639
Speaker 5: You know, some Twitter people thought that was QI or

536
00:26:28,640 --> 00:26:31,080
Speaker 5: it wasn't, But like, what is like talk to us

537
00:26:31,119 --> 00:26:33,240
Speaker 5: about that tension of if the Fed. You know, it's

538
00:26:33,280 --> 00:26:35,359
Speaker 5: like you mentioned, it's like, okay, let's say JP Morgan,

539
00:26:35,359 --> 00:26:37,320
Speaker 5: we're getting into trouble. But you know that could happen

540
00:26:37,359 --> 00:26:40,040
Speaker 5: at a time of high inflation, and as Tracy mentioned,

541
00:26:40,680 --> 00:26:42,800
Speaker 5: you it could happen that some bank through the treasury

542
00:26:42,880 --> 00:26:45,960
Speaker 5: channel literally did how do central bankers think about this

543
00:26:46,040 --> 00:26:47,280
Speaker 5: tension or how do you resolve that?

544
00:26:47,560 --> 00:26:50,639
Speaker 6: Well, central bankers might not, I mean at the absolute limit.

545
00:26:50,920 --> 00:26:54,600
Speaker 6: This is why crisis interventions are you know, capital injections

546
00:26:54,600 --> 00:26:57,520
Speaker 6: and guarantees and physically you know, it's sort of all

547
00:26:57,560 --> 00:26:59,560
Speaker 6: these things at once. And why this kind can't go

548
00:26:59,640 --> 00:27:01,680
Speaker 6: back to this, i't know why it's not always enough

549
00:27:01,680 --> 00:27:05,040
Speaker 6: and why it doesn't solve every crisis. But that's exactly

550
00:27:05,119 --> 00:27:07,320
Speaker 6: why you see have to see you know, quote unquote

551
00:27:07,320 --> 00:27:11,919
Speaker 6: innovative things like valuing collateral at par and the BTFP

552
00:27:12,200 --> 00:27:14,640
Speaker 6: and the arbitrage and sort of the turning out losses

553
00:27:14,720 --> 00:27:17,600
Speaker 6: is a little unique because all the loss is really

554
00:27:17,600 --> 00:27:19,920
Speaker 6: built up just in treasuries at the time. You know,

555
00:27:19,960 --> 00:27:22,560
Speaker 6: if you're thinking about something like commercial real estate to

556
00:27:22,600 --> 00:27:25,480
Speaker 6: pick a random ass set class, the credit risk is

557
00:27:25,480 --> 00:27:28,080
Speaker 6: indogenous to the FED, right, so it's not a case

558
00:27:28,080 --> 00:27:32,160
Speaker 6: where the losses necessarily materialized over time. The FED can

559
00:27:32,200 --> 00:27:34,760
Speaker 6: come along and write, you know, basically a put option

560
00:27:34,840 --> 00:27:37,679
Speaker 6: on credit risk in a way that even valuing collateral

561
00:27:37,720 --> 00:27:39,800
Speaker 6: at par it sort of couldn't with the BTFP.

562
00:27:40,640 --> 00:27:43,520
Speaker 2: So I mentioned at the beginning that we are seeing

563
00:27:43,760 --> 00:27:47,399
Speaker 2: various attempts to tweak and in some cases like change

564
00:27:47,440 --> 00:27:51,719
Speaker 2: significantly the way these various facilities are used. If you

565
00:27:51,800 --> 00:27:55,240
Speaker 2: were Michael Sue at the OCC or if you were

566
00:27:55,440 --> 00:27:58,320
Speaker 2: Michael Barr, the Vice Chair of Supervision at the FED,

567
00:27:58,400 --> 00:28:02,040
Speaker 2: if you were like the ultimate Michael, basically, how would

568
00:28:02,080 --> 00:28:05,920
Speaker 2: you be arranging this constellation of facilities.

569
00:28:06,680 --> 00:28:09,359
Speaker 6: Yeah, there's a few things. I mean, one we can

570
00:28:09,400 --> 00:28:12,520
Speaker 6: talk about the standing repo facility, but I might pop

571
00:28:12,560 --> 00:28:13,679
Speaker 6: a blood vessel if we do that.

572
00:28:14,320 --> 00:28:15,040
Speaker 3: I want to see that.

573
00:28:15,080 --> 00:28:16,880
Speaker 4: Okay, no, no, we'll get to that.

574
00:28:17,359 --> 00:28:19,600
Speaker 6: The biggest thing is you have to have some carrot

575
00:28:19,720 --> 00:28:22,080
Speaker 6: at the window because the FED, so it used to

576
00:28:22,080 --> 00:28:25,040
Speaker 6: be even in recent history, that there was a premium

577
00:28:25,080 --> 00:28:26,560
Speaker 6: to go to this kind wind to Right, you want

578
00:28:26,560 --> 00:28:29,000
Speaker 6: banks to like be evaluated by the market when they're

579
00:28:29,000 --> 00:28:32,440
Speaker 6: getting funding, and you don't want like haircuts at the

580
00:28:32,440 --> 00:28:36,480
Speaker 6: discount window being your effective collateral requirements. So like there

581
00:28:36,560 --> 00:28:38,760
Speaker 6: is a reason to not run everything out of the FED. Right,

582
00:28:38,800 --> 00:28:41,200
Speaker 6: they're not asset managers. But at the same time you

583
00:28:41,800 --> 00:28:43,600
Speaker 6: have this tension where you want them to come when

584
00:28:43,640 --> 00:28:45,520
Speaker 6: the time is right, So you have to have something

585
00:28:45,520 --> 00:28:47,280
Speaker 6: send there for the banks go because the Fed can't

586
00:28:47,280 --> 00:28:48,800
Speaker 6: go any lower on price. It used to be one

587
00:28:48,840 --> 00:28:51,560
Speaker 6: hundred basis point premium. We've seen the Fed lower this

588
00:28:51,600 --> 00:28:54,320
Speaker 6: in crisis. They lowered it to zero over FED funds

589
00:28:54,320 --> 00:28:56,920
Speaker 6: in COVID and it's been there since. So it's clear

590
00:28:57,000 --> 00:28:58,960
Speaker 6: that they are keeping it. You know, they're keeping the

591
00:28:59,000 --> 00:29:01,640
Speaker 6: discount window right at top of FED funds, so they

592
00:29:01,640 --> 00:29:03,920
Speaker 6: really can't go any lower because then you know, we're

593
00:29:03,960 --> 00:29:06,960
Speaker 6: in the BTFP problem where they're they're taking in less

594
00:29:07,000 --> 00:29:09,719
Speaker 6: and then you can pay on interest on reserves. So

595
00:29:09,840 --> 00:29:13,600
Speaker 6: you have to have some regulatory carrot and stick basically

596
00:29:13,600 --> 00:29:16,520
Speaker 6: for the discount windows. So that's a big piece. Second

597
00:29:16,520 --> 00:29:19,720
Speaker 6: thing is get the FHLBS out of the lender of

598
00:29:19,800 --> 00:29:22,920
Speaker 6: last resort game. We sort of got a unique political

599
00:29:22,960 --> 00:29:25,160
Speaker 6: moment in that the FAHFA put out a report a

600
00:29:25,200 --> 00:29:27,760
Speaker 6: few months back kind is saying this thing right, like,

601
00:29:27,880 --> 00:29:29,800
Speaker 6: you know, my sense is Sandra Thompson, the head of

602
00:29:29,800 --> 00:29:32,720
Speaker 6: the FAHFA, cares about affordable housing, right, she doesn't want

603
00:29:32,760 --> 00:29:35,600
Speaker 6: to be in this world of like bankers just lending

604
00:29:35,600 --> 00:29:37,560
Speaker 6: to each other and it goes to a trillion dollars

605
00:29:37,760 --> 00:29:40,760
Speaker 6: in a crisis, and it's just sort of so far

606
00:29:40,840 --> 00:29:43,200
Speaker 6: from where those institutions started and so far from the

607
00:29:43,240 --> 00:29:45,560
Speaker 6: goal of housing, Like get them out of the lender

608
00:29:45,560 --> 00:29:48,200
Speaker 6: of last resort game, don't let them pay dividends based

609
00:29:48,240 --> 00:29:50,880
Speaker 6: on who borrows, pay dividends based on who does affordable

610
00:29:50,880 --> 00:29:53,640
Speaker 6: housing or something, you know, something along those lines, and

611
00:29:54,000 --> 00:29:56,520
Speaker 6: basically write up a bunch of term sheets for all

612
00:29:56,520 --> 00:29:59,560
Speaker 6: these different potential thirteen three facilities that you're going to

613
00:29:59,640 --> 00:30:01,840
Speaker 6: have to roll out. Because the other piece of this is,

614
00:30:01,880 --> 00:30:04,760
Speaker 6: like going back to your rates question, Joe, all we

615
00:30:04,800 --> 00:30:07,400
Speaker 6: talk about now is central bank intervention. Like anytime a

616
00:30:07,480 --> 00:30:09,760
Speaker 6: market blows up, it's where's the ECB, where's the boj

617
00:30:10,000 --> 00:30:13,760
Speaker 6: like buy equities now, bail out this bank, Like especially

618
00:30:13,880 --> 00:30:17,560
Speaker 6: since two thousand and eight, and where was all this before.

619
00:30:17,600 --> 00:30:19,680
Speaker 6: It's like, well, they just cut rates when we didn't

620
00:30:19,680 --> 00:30:21,200
Speaker 6: have to worry about the zero lower bound. They just

621
00:30:21,240 --> 00:30:23,240
Speaker 6: cut rates, And you know that was sort of the

622
00:30:23,240 --> 00:30:26,680
Speaker 6: green Span playbook, right, just like let some financial froth

623
00:30:26,760 --> 00:30:28,520
Speaker 6: come out and then clean up the mess with rates.

624
00:30:29,240 --> 00:30:31,080
Speaker 6: So that's sort of the other reason that we're talking

625
00:30:31,080 --> 00:30:32,880
Speaker 6: about this more and more and more is we're worried

626
00:30:32,880 --> 00:30:33,920
Speaker 6: about the zero lower bound.

627
00:30:34,280 --> 00:30:37,120
Speaker 5: Talk to us about the standing repot facilities.

628
00:30:37,120 --> 00:30:38,000
Speaker 6: It seems like a.

629
00:30:37,880 --> 00:30:39,320
Speaker 4: Good idea, you know, just always be.

630
00:30:39,320 --> 00:30:41,320
Speaker 2: There and well his head just exploded.

631
00:30:41,760 --> 00:30:44,320
Speaker 5: Shoot, shoot, it's nice knowing you, Steven.

632
00:30:44,720 --> 00:30:45,400
Speaker 6: It's okay.

633
00:30:47,400 --> 00:30:49,120
Speaker 4: What's the downside? Always seemed like a good idea.

634
00:30:49,160 --> 00:30:51,320
Speaker 6: So the standing repol facility is so first of all,

635
00:30:51,320 --> 00:30:54,400
Speaker 6: it's basically they just got window for treasuries and agencies.

636
00:30:54,760 --> 00:30:57,160
Speaker 6: The nice thing about it is that it adds primary dealers.

637
00:30:57,200 --> 00:30:59,120
Speaker 6: You hear the FED talk about it and they like

638
00:30:59,160 --> 00:31:01,280
Speaker 6: want to add all these to it, but it's just

639
00:31:01,360 --> 00:31:04,240
Speaker 6: the discount window. You can bring treasuries to the discount window,

640
00:31:05,440 --> 00:31:07,800
Speaker 6: so that whole piece of it of like, let's get

641
00:31:07,800 --> 00:31:10,479
Speaker 6: banks involved. It would really only be valuable if you,

642
00:31:10,520 --> 00:31:15,080
Speaker 6: as a bank, like the depository subsidiary, had collateral in

643
00:31:15,160 --> 00:31:17,280
Speaker 6: the tri party repol market. Because the FED runs this

644
00:31:17,320 --> 00:31:20,200
Speaker 6: program out of the triparty repo market. It's not like

645
00:31:20,200 --> 00:31:23,400
Speaker 6: the discount window in that sense, so that part's sort

646
00:31:23,440 --> 00:31:25,640
Speaker 6: of goofy. It's nice to have it for the primary dealers,

647
00:31:26,000 --> 00:31:27,920
Speaker 6: but there's two problems we have with it. One, and

648
00:31:28,040 --> 00:31:30,400
Speaker 6: Zultan has talked about this on this podcast at length,

649
00:31:30,440 --> 00:31:33,200
Speaker 6: which is you're relying on the primary dealer's balance sheet

650
00:31:33,240 --> 00:31:35,280
Speaker 6: to sort of on lend it to everybody, you know,

651
00:31:35,400 --> 00:31:38,320
Speaker 6: repurpose the liquidity for every hedge fund that needs it

652
00:31:38,360 --> 00:31:40,440
Speaker 6: in a time of crisis, and that just doesn't work

653
00:31:40,480 --> 00:31:43,960
Speaker 6: because balance sheets get pinched. And then the alternative is like, okay,

654
00:31:44,000 --> 00:31:45,920
Speaker 6: you let every hedge fund come directly to the FED,

655
00:31:46,120 --> 00:31:49,160
Speaker 6: and there are political and legal issues with that. The

656
00:31:49,200 --> 00:31:51,280
Speaker 6: other thing is, again, it's not like it takes a

657
00:31:51,320 --> 00:31:53,719
Speaker 6: matched book, right. The Sandry po facility is not going

658
00:31:53,760 --> 00:31:55,960
Speaker 6: to take your treasury and your future. So if you

659
00:31:56,000 --> 00:31:58,600
Speaker 6: look at something like the basis trade and the risks

660
00:31:58,600 --> 00:32:01,360
Speaker 6: we have around the basis trade, I take very little

661
00:32:01,360 --> 00:32:03,920
Speaker 6: comfort in the standing repel facility, even though some folks do,

662
00:32:04,040 --> 00:32:07,560
Speaker 6: because when the basis blows out, you basically have the

663
00:32:07,600 --> 00:32:10,760
Speaker 6: cash price falls and the futures tightened, right, And that's

664
00:32:10,800 --> 00:32:14,280
Speaker 6: that's what we saw in March twenty twenty. And all

665
00:32:14,280 --> 00:32:16,960
Speaker 6: the standing repel facility can do is replace your repot

666
00:32:16,960 --> 00:32:20,239
Speaker 6: funding at that new market value. So it goes back

667
00:32:20,280 --> 00:32:23,080
Speaker 6: to this issue of like where do you value the Collaterally,

668
00:32:23,200 --> 00:32:24,760
Speaker 6: it's not going to recognize, oh, you have a future

669
00:32:24,800 --> 00:32:27,120
Speaker 6: and you have a treasury, so I'm going to lend

670
00:32:27,360 --> 00:32:29,120
Speaker 6: you know, at the collective value of that portfolio. It's

671
00:32:29,120 --> 00:32:32,040
Speaker 6: gonna lend at the cash value of your dash to

672
00:32:32,160 --> 00:32:35,280
Speaker 6: cash treasury that everybody's trying to get rid of, and

673
00:32:35,320 --> 00:32:37,040
Speaker 6: so you're just gonna get caught in that spiral.

674
00:32:37,360 --> 00:32:38,160
Speaker 4: What does a bank do?

675
00:32:39,320 --> 00:32:42,320
Speaker 5: No, seriously, what is the main product that a bank offers?

676
00:32:42,800 --> 00:32:43,440
Speaker 6: Deposits?

677
00:32:43,880 --> 00:32:45,520
Speaker 5: Can you explain it? And like when I think it's like, oh,

678
00:32:45,520 --> 00:32:46,800
Speaker 5: I want to go to the bank, I want to loan.

679
00:32:46,960 --> 00:32:49,240
Speaker 2: If a bank offers mostly deposits, why are they all

680
00:32:49,320 --> 00:32:52,360
Speaker 2: so bad at actually matching the benchmark interest rate?

681
00:32:52,880 --> 00:32:56,600
Speaker 6: Because deposits are a service. That's exactly what I disagree.

682
00:32:57,280 --> 00:32:59,640
Speaker 5: This is my saying, this is my this is my

683
00:32:59,800 --> 00:33:01,960
Speaker 5: our We should be paying the bank for deposits. I

684
00:33:02,960 --> 00:33:07,120
Speaker 5: love easy online banking services and free ATM withdrawals. Why

685
00:33:07,160 --> 00:33:07,960
Speaker 5: aren't I paying them?

686
00:33:08,280 --> 00:33:10,560
Speaker 6: Well, not only that, it's the ledger tracy, that it's

687
00:33:10,600 --> 00:33:12,600
Speaker 6: the ledger of the whole economy. You cannot make a

688
00:33:12,600 --> 00:33:16,280
Speaker 6: payment that isn't a deposit transfer, you know, happening somewhere

689
00:33:16,280 --> 00:33:19,200
Speaker 6: at the back end, And that is a service that

690
00:33:19,240 --> 00:33:23,240
Speaker 6: banks offer. And that is exactly why the franchise value

691
00:33:23,240 --> 00:33:24,920
Speaker 6: can erode so quickly, because if you say, oh, we

692
00:33:24,960 --> 00:33:26,640
Speaker 6: have all the quity we need at the discount window

693
00:33:26,680 --> 00:33:29,560
Speaker 6: because we're highly capitalized, which failed banks always have great

694
00:33:29,600 --> 00:33:32,360
Speaker 6: capital ratios, right, so they can take their collateral to

695
00:33:32,400 --> 00:33:34,800
Speaker 6: the window, haircut it whatever. But you have no deposit

696
00:33:34,800 --> 00:33:37,600
Speaker 6: franchise left. And the deposit franchise is what was allowing

697
00:33:37,640 --> 00:33:40,480
Speaker 6: you to borrow at zero, you know, and and lend

698
00:33:40,480 --> 00:33:43,000
Speaker 6: it three. So that's your franchise value.

699
00:33:43,400 --> 00:33:46,120
Speaker 2: I realized we've made it through this entire conversation without

700
00:33:46,200 --> 00:33:49,960
Speaker 2: even touching the basil endgame proposals. Should we do it? Yeah,

701
00:33:50,080 --> 00:33:52,240
Speaker 2: let's go for it, all right, Basil.

702
00:33:53,680 --> 00:33:56,160
Speaker 6: I mean, it's almost not worth it because it's not

703
00:33:56,200 --> 00:33:58,160
Speaker 6: going to look anything like it does now. I mean,

704
00:33:58,440 --> 00:33:59,280
Speaker 6: I don't even know.

705
00:33:59,240 --> 00:33:59,880
Speaker 4: What doesn't mean.

706
00:34:00,120 --> 00:34:02,280
Speaker 6: Well, there's a lot of places in it that look

707
00:34:02,400 --> 00:34:04,520
Speaker 6: like easy fixes. You know, there's like weird charges that

708
00:34:04,560 --> 00:34:08,200
Speaker 6: show up for like climate financing, or like random distortions

709
00:34:08,200 --> 00:34:09,879
Speaker 6: that happen in housing. So the Fed's going to look

710
00:34:09,960 --> 00:34:12,200
Speaker 6: very responsive. It's going to look like it changed a

711
00:34:12,200 --> 00:34:14,040
Speaker 6: lot of things. The other thing is they've sort of

712
00:34:14,080 --> 00:34:17,160
Speaker 6: signaled that they want more consensus than they had putting

713
00:34:17,160 --> 00:34:19,400
Speaker 6: out the proposal, and they had two descents putting out

714
00:34:19,400 --> 00:34:22,560
Speaker 6: the proposal. They had Mickey Bowman, who they're never going

715
00:34:22,640 --> 00:34:24,719
Speaker 6: to get. She hates everything the FED has done on

716
00:34:24,719 --> 00:34:27,640
Speaker 6: the regulatory front in the last year. And it's Chris

717
00:34:27,680 --> 00:34:32,000
Speaker 6: Waller who has really talked about the operational piece, which

718
00:34:32,320 --> 00:34:34,440
Speaker 6: is a little bit distortive, so that the proposal sort

719
00:34:34,480 --> 00:34:38,120
Speaker 6: of looks at charging for operational risk based on like

720
00:34:38,360 --> 00:34:40,799
Speaker 6: the size of a business, So like the size of

721
00:34:40,800 --> 00:34:43,640
Speaker 6: an asset management business would cause you to need to hold,

722
00:34:43,800 --> 00:34:46,160
Speaker 6: you know, more capital, but those businesses tend to be

723
00:34:46,280 --> 00:34:48,040
Speaker 6: very stabilizing, Like look at what we've seen that happened

724
00:34:48,040 --> 00:34:50,799
Speaker 6: to Morgan Stanley, Like it's a diversifying business, it's sort

725
00:34:50,800 --> 00:34:53,440
Speaker 6: of a all seasons business. So I think we'll probably

726
00:34:53,440 --> 00:34:55,760
Speaker 6: see a lot of changes on the operational risk charges

727
00:34:55,800 --> 00:34:56,960
Speaker 6: as well.

728
00:34:57,000 --> 00:35:01,680
Speaker 5: Prior to SVB, I believe a lot of fights around

729
00:35:02,000 --> 00:35:06,160
Speaker 5: the regulatory limits and whether stress tests about like banks

730
00:35:06,160 --> 00:35:08,960
Speaker 5: that weren't the mega, too big defail banks, but weren't

731
00:35:08,960 --> 00:35:12,040
Speaker 5: necessarily like the little tiny community banks out in the

732
00:35:12,040 --> 00:35:14,360
Speaker 5: middle of nowhere. And I think like SVB and some

733
00:35:14,360 --> 00:35:16,480
Speaker 5: of these other sort of like fell in that middle

734
00:35:17,080 --> 00:35:20,799
Speaker 5: and in a way like probably harmed themselves because in retrospect,

735
00:35:20,840 --> 00:35:23,160
Speaker 5: they probably just would have been better off taking a

736
00:35:23,160 --> 00:35:25,200
Speaker 5: little bit of hit to profitability for a sort of

737
00:35:25,239 --> 00:35:27,839
Speaker 5: like tighter regulatory requirement.

738
00:35:28,239 --> 00:35:30,120
Speaker 4: What is happening with regulation for some of these more

739
00:35:30,160 --> 00:35:30,760
Speaker 4: mid sized.

740
00:35:30,600 --> 00:35:33,160
Speaker 6: Banks, Well, I mean the goal is to bring them

741
00:35:33,200 --> 00:35:36,320
Speaker 6: all into into to sort of recognize them as big banks,

742
00:35:37,040 --> 00:35:38,080
Speaker 6: which you know.

743
00:35:38,200 --> 00:35:39,680
Speaker 4: It, why not do that?

744
00:35:39,719 --> 00:35:42,439
Speaker 6: There are like maybe legal reasons and blah blah blah,

745
00:35:42,880 --> 00:35:46,600
Speaker 6: But I'm really not convinced. But I'm also like fundamentally, like,

746
00:35:46,640 --> 00:35:48,960
Speaker 6: will we take a step back from the capital regulation debate?

747
00:35:49,000 --> 00:35:52,360
Speaker 6: Like we're talking about changing ratios from like twelve percent

748
00:35:52,440 --> 00:35:54,600
Speaker 6: to thirteen and a half. Like, I get why a

749
00:35:54,640 --> 00:35:56,400
Speaker 6: bank is annoyed. I get why there's all these interest

750
00:35:56,400 --> 00:35:59,279
Speaker 6: groups involved, but like from a systemic perspective, that's just

751
00:35:59,320 --> 00:36:01,759
Speaker 6: not that interesting. That's not gonna be the difference between

752
00:36:01,760 --> 00:36:03,320
Speaker 6: two thousand and eight and not. And it's also not

753
00:36:03,320 --> 00:36:06,399
Speaker 6: gonna be difference between a profitable banking system that beats

754
00:36:06,480 --> 00:36:07,680
Speaker 6: Europe in China and not.

755
00:36:08,400 --> 00:36:10,839
Speaker 2: I mean, it is true that Sphoebe had a carve

756
00:36:10,920 --> 00:36:13,839
Speaker 2: out as a smaller bank, and there is discussion about

757
00:36:13,840 --> 00:36:16,160
Speaker 2: whether or not those carve outs should exist, but just

758
00:36:16,200 --> 00:36:19,719
Speaker 2: backing up for a second big picture, I feel like

759
00:36:19,960 --> 00:36:23,200
Speaker 2: in the US we have yet to decide what we

760
00:36:23,280 --> 00:36:26,200
Speaker 2: want the banking system to actually look like. So there's

761
00:36:26,239 --> 00:36:29,319
Speaker 2: this sort of it's a wonderful life vision where you

762
00:36:29,400 --> 00:36:33,279
Speaker 2: have all these local banks, community banks, even in New York,

763
00:36:33,600 --> 00:36:36,640
Speaker 2: and they know you and they build up that relationship

764
00:36:36,800 --> 00:36:40,400
Speaker 2: and you know, you get those benefits. But on the

765
00:36:40,440 --> 00:36:43,719
Speaker 2: other hand, they're also you know, our experience of last

766
00:36:43,800 --> 00:36:45,879
Speaker 2: year is that maybe there is a benefit to being

767
00:36:45,960 --> 00:36:50,120
Speaker 2: extremely large and efficient and having a funding advantage and

768
00:36:50,160 --> 00:36:50,799
Speaker 2: things like that.

769
00:36:51,000 --> 00:36:52,320
Speaker 1: And it feels.

770
00:36:51,960 --> 00:36:56,160
Speaker 2: To me like the regulators, politicians, basically everyone involved in

771
00:36:56,200 --> 00:36:59,919
Speaker 2: this equation has yet to figure out exactly what they want.

772
00:37:00,480 --> 00:37:02,320
Speaker 6: Yeah, and it's a hard thing to talk about because

773
00:37:03,320 --> 00:37:05,000
Speaker 6: you know, you can't go out as like Japol and

774
00:37:05,000 --> 00:37:06,680
Speaker 6: be like, I think we should have less banks, because

775
00:37:06,680 --> 00:37:08,960
Speaker 6: you'll have less banks by Friday, right, So.

776
00:37:10,560 --> 00:37:11,919
Speaker 4: Yeah, it's a good way to do it.

777
00:37:11,920 --> 00:37:13,839
Speaker 6: It's a hard thing to talk about. And you know,

778
00:37:14,040 --> 00:37:16,040
Speaker 6: they've pushed back on this idea of like a Barbell

779
00:37:16,120 --> 00:37:18,520
Speaker 6: banking system, which is sort of the mid sized ones

780
00:37:18,560 --> 00:37:21,359
Speaker 6: get hollowed out, either downsize or upsize, and you're left

781
00:37:21,400 --> 00:37:24,600
Speaker 6: with community banks. And bigger banks, and that is sort

782
00:37:24,640 --> 00:37:27,840
Speaker 6: of the verdict of twenty twenty threes. You would say, okay,

783
00:37:27,880 --> 00:37:30,239
Speaker 6: big banks did well, small banks did well. Let's just

784
00:37:30,239 --> 00:37:32,640
Speaker 6: get rid of the mid size banks. But you know,

785
00:37:32,880 --> 00:37:35,040
Speaker 6: there's small banks that are very dependent on the local economy.

786
00:37:35,200 --> 00:37:38,040
Speaker 6: I will say, big picture, you cannot be a niche

787
00:37:38,040 --> 00:37:41,080
Speaker 6: bank that is also under the pressure of financial markets,

788
00:37:41,400 --> 00:37:45,360
Speaker 6: like you can't be focused on Silicon Valley and also,

789
00:37:45,680 --> 00:37:48,880
Speaker 6: you know, need to raise equity and have attentive you know, headlines.

790
00:37:49,160 --> 00:37:51,400
Speaker 6: If you're a community bank, you can probably run on

791
00:37:51,880 --> 00:37:55,200
Speaker 6: negative equity longer than you know, a mid size bank

792
00:37:55,200 --> 00:37:56,680
Speaker 6: that has to go to market and things like that.

793
00:37:57,440 --> 00:38:00,279
Speaker 2: All right, Steven Kelly, thank you so much for coming

794
00:38:00,280 --> 00:38:03,320
Speaker 2: on all thoughts and letting us trigger you for basically

795
00:38:03,400 --> 00:38:05,799
Speaker 2: forty minutes. I really appreciate it. That was great.

796
00:38:05,880 --> 00:38:32,080
Speaker 3: Yeah, thanks, thanks guys.

797
00:38:20,200 --> 00:38:23,239
Speaker 2: So Joe, I really enjoyed that conversation. I have a

798
00:38:23,280 --> 00:38:26,120
Speaker 2: feeling it's going to be a very relevant one in

799
00:38:26,320 --> 00:38:30,000
Speaker 2: twenty twenty four as we start to see more movement

800
00:38:30,080 --> 00:38:33,080
Speaker 2: on these various issues, including you know, maybe reforming the

801
00:38:33,160 --> 00:38:37,480
Speaker 2: discount window whatever. The basil end game actually ends up

802
00:38:37,640 --> 00:38:40,160
Speaker 2: looking like there are a few interesting things that I

803
00:38:40,160 --> 00:38:42,840
Speaker 2: would pick out there. So one of them was Steven's

804
00:38:42,880 --> 00:38:47,160
Speaker 2: emphasis of how important the actual banking franchise, the deposit

805
00:38:47,239 --> 00:38:51,239
Speaker 2: franchise is to funding. And you know, if the franchise

806
00:38:51,320 --> 00:38:53,719
Speaker 2: starts to go like that's when you do get the

807
00:38:53,760 --> 00:38:56,680
Speaker 2: deposit issues and then you can't actually raise capital. And

808
00:38:56,719 --> 00:38:59,600
Speaker 2: I think some of that did get lost in the

809
00:38:59,640 --> 00:39:04,080
Speaker 2: conf around SVB and Signature and First Republic, where it

810
00:39:04,120 --> 00:39:06,920
Speaker 2: was more like, oh, these banks kind of got unlucky,

811
00:39:07,040 --> 00:39:09,640
Speaker 2: like they bought too many bonds or whatever.

812
00:39:10,239 --> 00:39:13,319
Speaker 5: No, that really connects some dots and crystallized a lot

813
00:39:13,360 --> 00:39:13,720
Speaker 5: of things.

814
00:39:13,800 --> 00:39:18,600
Speaker 4: And I had forgotten with SVB that prior to the.

815
00:39:18,800 --> 00:39:21,600
Speaker 5: Run that did happen on the bank, there was the

816
00:39:21,680 --> 00:39:25,200
Speaker 5: deposit shrinkage that was simply as a result of Silicon

817
00:39:25,280 --> 00:39:28,560
Speaker 5: Valley financial conditions at the time, which is that there

818
00:39:28,600 --> 00:39:32,200
Speaker 5: was no IPO window for a while there, and there

819
00:39:32,200 --> 00:39:34,480
Speaker 5: was no new fundraising, right, so you didn't have these

820
00:39:34,600 --> 00:39:37,200
Speaker 5: these startups and stuff did not have fresh cash coming in,

821
00:39:37,320 --> 00:39:39,319
Speaker 5: and they were in survival mode and you know, they're

822
00:39:39,360 --> 00:39:42,399
Speaker 5: like spending down their money all the time. So there

823
00:39:42,440 --> 00:39:44,359
Speaker 5: was this sort of like natural it was not a run.

824
00:39:44,400 --> 00:39:47,120
Speaker 5: It had it wasn't even about the treasuries. It was

825
00:39:47,200 --> 00:39:50,160
Speaker 5: not about the report on the sub stack in January

826
00:39:50,160 --> 00:39:52,920
Speaker 5: of that year. That's like Burn Hobart, the author of

827
00:39:52,960 --> 00:39:54,120
Speaker 5: the newsletter.

828
00:39:54,640 --> 00:39:55,279
Speaker 4: It's like, by the.

829
00:39:55,200 --> 00:39:58,040
Speaker 5: Way, Silicon Valley Bank is insolvent, you guys should check

830
00:39:58,040 --> 00:39:59,640
Speaker 5: this out, and like people like ignored it for about

831
00:39:59,640 --> 00:40:01,759
Speaker 5: four weeks. It was not about that. It was just

832
00:40:01,760 --> 00:40:03,919
Speaker 5: about the fact that the deposits were going down.

833
00:40:04,120 --> 00:40:07,879
Speaker 2: Yeah, however, Joe, I really I remain reluctant to pay

834
00:40:07,920 --> 00:40:09,480
Speaker 2: my bank a fee. I don't want to.

835
00:40:09,960 --> 00:40:11,080
Speaker 4: No, I mean I don't.

836
00:40:11,200 --> 00:40:14,439
Speaker 5: I like having free banking and I like having free

837
00:40:14,480 --> 00:40:17,000
Speaker 5: access to ATMs and the website and a nice app

838
00:40:17,080 --> 00:40:19,840
Speaker 5: and stuff like that. But it does really make sense

839
00:40:19,880 --> 00:40:24,160
Speaker 5: and sort of like crystallize this point, which is that

840
00:40:24,160 --> 00:40:26,880
Speaker 5: that is the only sub market rate borrowing in the

841
00:40:26,920 --> 00:40:29,560
Speaker 5: world right like basically for the banks, and there's a

842
00:40:29,600 --> 00:40:31,800
Speaker 5: reason that they can get submarket rate because they also

843
00:40:31,920 --> 00:40:35,080
Speaker 5: throw in this service for you. But you know, there

844
00:40:35,160 --> 00:40:37,240
Speaker 5: was like that chart we had it at our recent

845
00:40:37,320 --> 00:40:40,080
Speaker 5: odd lotch trivia night that Josh Younger showed, which is

846
00:40:40,120 --> 00:40:42,120
Speaker 5: like the Fed funds rate and then is like what

847
00:40:42,239 --> 00:40:44,880
Speaker 5: is this rate below it? And there really is only

848
00:40:44,920 --> 00:40:46,960
Speaker 5: one rate in the world that's going to ever like

849
00:40:47,000 --> 00:40:49,560
Speaker 5: be below the Fed funds rate, and that's like the

850
00:40:49,600 --> 00:40:51,640
Speaker 5: special rate that banks can borrow at from their own

851
00:40:51,640 --> 00:40:52,759
Speaker 5: customers deposits.

852
00:40:52,840 --> 00:40:55,880
Speaker 2: Yeah, you did mention I think earlier in the intro

853
00:40:56,000 --> 00:40:58,520
Speaker 2: that around this time last year. So in addition to

854
00:40:58,560 --> 00:41:02,080
Speaker 2: the Bill Nelson on the Disco episode that we did

855
00:41:02,160 --> 00:41:05,760
Speaker 2: in January, I think in February probably, Yeah, we spoke

856
00:41:05,800 --> 00:41:09,600
Speaker 2: to Joe aboute over at Barkley's about exactly this issue,

857
00:41:09,640 --> 00:41:15,640
Speaker 2: so deposit rates, the beta Joe benchmark interest rates. So yeah,

858
00:41:15,840 --> 00:41:17,040
Speaker 2: I think we're pretty on the ball.

859
00:41:17,200 --> 00:41:20,520
Speaker 5: We're pretty on the ball. And that talking Stephen that

860
00:41:20,719 --> 00:41:23,520
Speaker 5: like at put a bunch of things ye together like

861
00:41:23,600 --> 00:41:25,480
Speaker 5: a lot of like light bulbs. Enough it's like, oh,

862
00:41:25,520 --> 00:41:27,480
Speaker 5: I get why this is the case, or I get

863
00:41:27,480 --> 00:41:30,279
Speaker 5: why that's not really an ultimate fix, et cetera.

864
00:41:30,440 --> 00:41:31,920
Speaker 4: So I really enjoyed that conversation.

865
00:41:32,080 --> 00:41:34,759
Speaker 2: Okay, on that self congratulatory.

866
00:41:34,200 --> 00:41:36,800
Speaker 5: The slubs, I'm gonna start calling it that. That's so

867
00:41:36,920 --> 00:41:39,920
Speaker 5: much easier to say than fhlb's.

868
00:41:39,239 --> 00:41:40,799
Speaker 4: Shall we leave it there, Let's leave it there.

869
00:41:40,920 --> 00:41:43,760
Speaker 2: This has been another episode of the All Thoughts podcast.

870
00:41:43,840 --> 00:41:47,120
Speaker 2: I'm Tracy Alloway. You can follow me at Tracy Alloway and.

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Speaker 5: I'm Joe Wisenthal. You can follow me at the Stalwart.

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00:41:49,880 --> 00:41:53,360
Speaker 5: Follow our guest Stephen Kelly at Stephen Kelly forty nine.

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00:41:53,480 --> 00:41:57,480
Speaker 5: Follow our producers Carman Rodriguez at Krman Arman Dashel Bennett

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Speaker 5: at Dashbot and kel Brooks at kel Brooks. Thank you

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00:42:00,800 --> 00:42:04,000
Speaker 5: to our producer Moses Ondam from our oddlotscontent. Go to

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Speaker 5: Bloomberg dot com slash odd Lots, where we post transcripts.

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Speaker 5: We have a blog and a weekly newsletter that Tracy

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00:42:09,960 --> 00:42:12,480
Speaker 5: and I write, and you can talk about all of

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Speaker 5: these topics with fellow listeners twenty four seven in the

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Speaker 5: discord Discord dot gg slash odlocks.

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Speaker 2: And if you enjoy Oddlots, if you like it when

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Speaker 2: we do deep dives on emergency lending facilities for banks,

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Speaker 2: then please leave us a positive review on your favorite

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Speaker 2: podcast platform. And remember, if you are a Bloomberg subscriber,

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Speaker 2: you can listen to all of our episodes absolutely ad free.

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Speaker 2: All you need to do is connect your Bloomberg account

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Speaker 2: to Apple Podcasts. Thanks for listening, Bead