WEBVTT - Kopi Time E150 - Piyush Gupta on the Present and Future of Banking 0:00:05.849 --> 0:00:08.920 Hello, this is COI Time podcast series on markets and 0:00:08.920 --> 0:00:12.930 economies from DBS Group Research. I'm Tambek, chief economist, welcoming 0:00:12.930 --> 0:00:17.520 you to our 150th episode. Today we're excited to have 0:00:17.520 --> 0:00:21.590 with us Pirush Gupta. He was with us 100 episodes ago, 0:00:21.799 --> 0:00:24.349 and now he is with us again during his last 0:00:24.350 --> 0:00:27.760 week as CEO of DBS and what a 15 year 0:00:27.760 --> 0:00:31.340 run it has been. Push Gupta, welcome back to Cui Time. 0:00:31.719 --> 0:00:31.879 We're 0:00:31.879 --> 0:00:33.840 happy to join you again, as you can see. 0:00:34.310 --> 0:00:36.650 Uh, I'm a little differently dressed this time. time more 0:00:36.650 --> 0:00:39.340 because I have 5 more days of devious life left. 0:00:39.509 --> 0:00:41.709 Like I said, what a run it has been. Great 0:00:41.709 --> 0:00:43.909 to have you and I look forward to having you 0:00:43.909 --> 0:00:45.630 in the future as well, which will be my parting 0:00:45.630 --> 0:00:48.150 word to you later on as well. Uh, I'd like 0:00:48.150 --> 0:00:51.750 to break our conversation into two parts. First, to take 0:00:51.750 --> 0:00:56.470 stock of how banks have done since the GFC 0809 0:00:56.470 --> 0:00:59.590 financial crisis and the aftermath of that, and then to 0:00:59.590 --> 0:01:02.389 get a sense of your thinking about where banks are going. 0:01:02.709 --> 0:01:06.529 So let's start by looking back. Uh, major global banks 0:01:06.529 --> 0:01:10.720 today are definitely more capitalized than they were 15 years ago, 0:01:10.809 --> 0:01:13.769 and they're definitely much more digital. How else are they different? 0:01:16.519 --> 0:01:21.080 Well, I think the consequence of the GFC, the most 0:01:21.080 --> 0:01:25.660 profound impact was the huge increase in capital, uh, across 0:01:25.660 --> 0:01:27.440 the system. I think there was a change in the 0:01:27.440 --> 0:01:30.399 liquidity rules, so I think it's safe to say the 0:01:30.400 --> 0:01:34.120 banking system, uh, specifically is a little bit more safe 0:01:34.120 --> 0:01:39.179 than it used to be 15 years ago, uh, but 0:01:39.879 --> 0:01:41.519 I think part, um. 0:01:42.480 --> 0:01:43.190 Uh 0:01:44.190 --> 0:01:46.569 So I want to say that weather's good. I think 0:01:46.569 --> 0:01:49.169 there were a lot of attendant challenges that came along 0:01:49.169 --> 0:01:51.290 with the transition to safety. 0:01:52.120 --> 0:01:55.919 The first, I think we took enormously long to build 0:01:55.919 --> 0:01:59.510 these safety pillars, and frankly, even today, 15 years later, 0:01:59.599 --> 0:02:03.160 the work is not done because the regulators keep tweaking. 0:02:03.879 --> 0:02:06.550 Um, they call it different names. Some people call it 0:02:06.550 --> 0:02:09.380 Basel 3.5, some call it Basel 4, some call it 0:02:09.380 --> 0:02:12.619 the Basel Endgame, some call it the Swiss Finish, but 0:02:12.788 --> 0:02:16.668 in every jurisdiction, regulators are still going back and revisiting 0:02:17.110 --> 0:02:20.820 what they did. In some cases trying to lighten the rules, 0:02:21.029 --> 0:02:24.190 some cases trying to, uh, add to the rules, and 0:02:24.190 --> 0:02:26.029 it just seems to me that 15 years is a 0:02:26.029 --> 0:02:30.520 long time to try and get to where you need to, um, 0:02:30.550 --> 0:02:32.549 so I think we took too long and that um. 0:02:33.270 --> 0:02:37.489 Passage of time created a degree of uncertainty in the system. 0:02:39.119 --> 0:02:42.288 The second thing is we didn't solve everything. Liquidity in 0:02:42.288 --> 0:02:48.609 particular created some consequential challenges as well. Um, holdings of treasuries, 0:02:48.690 --> 0:02:51.970 for example, you know, the banks started running shy of 0:02:51.970 --> 0:02:54.538 doing some of that, so they started creating these saw 0:02:54.538 --> 0:02:58.889 effects in the treasury markets. We saw through the US 0:02:58.889 --> 0:03:02.250 regional bank crisis that many of the smaller banks did 0:03:02.250 --> 0:03:05.770 not actually embrace some of the liquidity rules completely. 0:03:06.440 --> 0:03:08.638 So not only did we take a long time getting 0:03:08.639 --> 0:03:14.009 to where we are, it wasn't completely consummate as well, 0:03:14.139 --> 0:03:16.289 and we left some gaps in the process. 0:03:17.199 --> 0:03:21.829 I think we could have done better as an industry. I'm. 0:03:22.850 --> 0:03:28.429 Reminded of the Asian financial crisis, so post '98, the 0:03:28.429 --> 0:03:31.788 Asian regulators and the Asian system also responded to the 0:03:31.788 --> 0:03:35.710 crisis in pretty much the same way. They added up 0:03:35.710 --> 0:03:40.070 capital requirements, they rethought some of the liquidity requirements. They 0:03:40.070 --> 0:03:43.350 became a lot more intrusive in their supervision, but they 0:03:43.350 --> 0:03:46.309 did it in a few years. They did it with 0:03:46.309 --> 0:03:48.350 a lot less song, dance and drama. 0:03:48.979 --> 0:03:52.399 And by now the Asian banks have proven over the 0:03:52.399 --> 0:03:57.759 subsequent 20 years that they became relatively strong uh uh 0:03:57.759 --> 0:04:02.119 in that period of time. So now when I say 0:04:02.119 --> 0:04:04.660 that this is a challenge, what is the implication of 0:04:04.660 --> 0:04:07.710 that been and that is bearing on how our banks different. 0:04:08.119 --> 0:04:11.199 The implication of that has been that the banks in 0:04:11.199 --> 0:04:14.350 general have won a battle which is around capital liquidity 0:04:14.350 --> 0:04:16.349 and solving for the old crisis. 0:04:16.940 --> 0:04:20.640 But I do think the banking system has not done 0:04:20.640 --> 0:04:23.320 as well as it could have in terms of the war, 0:04:23.359 --> 0:04:26.170 which is thinking about the shape and nature of banking 0:04:26.170 --> 0:04:26.910 in the future. 0:04:27.859 --> 0:04:32.390 Um, today, most banks have embraced digital, but the reality 0:04:32.390 --> 0:04:35.589 is that as late as 2016, 2017, I used to 0:04:35.589 --> 0:04:37.950 reflect on the fact that there are only a couple 0:04:37.950 --> 0:04:40.829 of banks in the world who are as focused as 0:04:40.829 --> 0:04:44.910 DBS was on the digitization agenda. Uh, in fact, when 0:04:44.910 --> 0:04:47.829 I talked about it at many global forums, it was 0:04:47.829 --> 0:04:50.909 so interesting that banks were still bothered about Basel. Nobody 0:04:50.910 --> 0:04:52.988 was talking technology or digital. 0:04:53.690 --> 0:04:56.769 So banks are not as advanced in the digital agenda 0:04:56.769 --> 0:04:57.649 as they should have been. 0:04:58.619 --> 0:05:01.049 Um, a lot of banks have great apps, but if 0:05:01.049 --> 0:05:04.320 you look at the underlying architecture of technology, uh, have 0:05:04.320 --> 0:05:10.000 banks shifted to, um, microservices, API based, cloud native technology? 0:05:10.320 --> 0:05:13.600 Very few have even now, and that says something that 0:05:13.600 --> 0:05:16.078 banks are still not as far advanced as they should be. 0:05:16.809 --> 0:05:20.859 Um, in some ways I was actually quite surprised in 0:05:20.859 --> 0:05:23.339 the last few months. The one country which has really 0:05:23.339 --> 0:05:27.320 made huge, uh, leaps in that regard is China, right? Uh, 0:05:27.339 --> 0:05:30.260 we realized that through the COVID period when, you know, 0:05:30.350 --> 0:05:34.058 nobody is watching, the Chinese leapfrogged in terms of their 0:05:34.059 --> 0:05:37.849 transition to the new technology architecture, and I find today 0:05:37.850 --> 0:05:39.820 that some of them have made even more progress than 0:05:39.820 --> 0:05:42.578 DBS has. But when we compare ourselves with many of 0:05:42.579 --> 0:05:45.380 the Western banks, I think we're still 57 years ahead. 0:05:45.829 --> 0:05:50.250 So long way to say safer banks, but might not 0:05:50.250 --> 0:05:54.429 have made as much progress on technology and digitization as 0:05:54.428 --> 0:05:56.669 you would have expected them to or would have liked 0:05:56.670 --> 0:05:57.220 them to. 0:05:58.420 --> 0:06:02.369 Right on that point that you referenced the '97, 98 crisis, 0:06:02.589 --> 0:06:05.190 it was a cataclysmic crisis. There was a lot of 0:06:05.190 --> 0:06:07.390 political dislocation and there was a lot of scarring. It 0:06:07.390 --> 0:06:09.500 took many countries years to come out of the crisis, 0:06:09.790 --> 0:06:12.170 but the banks were not considered villains in that crisis. 0:06:12.178 --> 0:06:13.659 In the 809 crisis. 0:06:14.149 --> 0:06:17.500 The banks were considered villains. I, I recall reading articles 0:06:17.500 --> 0:06:18.940 about that, you know, that there should be so much 0:06:18.940 --> 0:06:23.219 regulatory oversight on banks that their profitability should be minimal. 0:06:23.299 --> 0:06:26.140 They should be turned into utilities. But looking at the 0:06:26.140 --> 0:06:28.459 bank's performance, say the last half a decade, they've done 0:06:28.459 --> 0:06:30.690 very well with the interest rate cycle and so on. 0:06:30.980 --> 0:06:35.220 So that, that portrayal of banks being the villain, being 0:06:35.220 --> 0:06:39.140 the problem, not the solution around 809, was that overstated? 0:06:39.260 --> 0:06:42.380 I think it was. So I think partly, well, it 0:06:42.380 --> 0:06:43.579 was self-inflicted damage. 0:06:44.290 --> 0:06:46.750 So you've got to figure forget two things that I 0:06:46.750 --> 0:06:50.500 think the industry did wrong in particularly the 80s and 90s, 0:06:50.549 --> 0:06:55.140 the build up to 2000. 1 was compensation became egregious 0:06:55.549 --> 0:06:58.709 and it started attracting a lot of attention when traders, 0:06:58.980 --> 0:07:04.339 investment bankers, individuals were getting paid $10.20 dollars, $30.40 million dollars. 0:07:04.709 --> 0:07:07.428 That attracts a lot of attention and calls the basic 0:07:07.428 --> 0:07:09.450 question to account. I mean, are you really worth it? 0:07:09.510 --> 0:07:11.549 So that is one thing of our own making. 0:07:11.899 --> 0:07:14.369 And if you look at the industry, this big step 0:07:14.369 --> 0:07:17.130 up in competition only happened in the 90s and 2000s, 0:07:17.209 --> 0:07:19.049 so it was a focused period of time. 0:07:19.690 --> 0:07:22.750 The second thing we did wrong is we lost sight 0:07:22.750 --> 0:07:26.630 of the purpose of a bank, which is the fundamental 0:07:26.630 --> 0:07:30.149 of doing real things for real people. So to an extent, 0:07:30.309 --> 0:07:32.679 some of our product selection and some of the things 0:07:32.679 --> 0:07:35.839 that the industry was doing uh started looking like it 0:07:35.839 --> 0:07:40.119 was self-serving as opposed to actually having a hand in 0:07:40.119 --> 0:07:43.950 furthering the interests of the real economy or individual citizens. 0:07:44.440 --> 0:07:47.559 So I think some of it was, um, you know, um, 0:07:47.679 --> 0:07:49.079 coming as a consequence. 0:07:49.549 --> 0:07:54.160 You contrast with Asia and even though the Asian banks 0:07:54.160 --> 0:07:57.549 got hammered in '98, by that Asia has worked as 0:07:57.549 --> 0:08:00.940 Asia Inc. The banks play a more constructive role along 0:08:00.940 --> 0:08:03.350 with the rest of society and therefore you never saw 0:08:03.350 --> 0:08:06.869 the same degree of angst about banks and banking. 0:08:07.230 --> 0:08:10.480 So I mean, the point is too, the reason why 0:08:10.480 --> 0:08:12.760 there was so much political outrage and therefore so much 0:08:12.760 --> 0:08:16.670 regulatory overhead was because of that. People thought that the 0:08:16.670 --> 0:08:19.510 banks and bankers were the villains of the piece. 0:08:20.299 --> 0:08:25.369 Uh, in some ways, even now, 15 years on, there 0:08:25.369 --> 0:08:28.130 pockets of the universe where this has not disappeared. There's 0:08:28.130 --> 0:08:30.769 some places where it has, but in some places you 0:08:30.769 --> 0:08:33.530 can still see this and the underlying nature of the 0:08:33.530 --> 0:08:37.439 dialogue and the nature of regulation, so it hasn't entirely gone. 0:08:38.750 --> 0:08:40.789 The other thing that I would have expected over the 0:08:40.789 --> 0:08:44.890 last 15 years with better analytics and better credit research 0:08:45.229 --> 0:08:48.869 that banks would be expanding their sort of volume of 0:08:48.869 --> 0:08:53.099 creditors or borrowers and that we will see the unbanked, 0:08:53.549 --> 0:08:55.669 whether it is in the corporate space, the space, or 0:08:55.669 --> 0:08:56.429 the retail space. 0:08:56.875 --> 0:08:59.354 Would be, you know, captured by banks because they have 0:08:59.354 --> 0:09:01.794 better data and better knowledge, but it seems like that 0:09:01.794 --> 0:09:04.315 space has been ceded to non-bank finance companies. So what's 0:09:04.315 --> 0:09:07.875 your sense of the banking, the unbanked dynamic over the 0:09:07.875 --> 0:09:08.315 last 15 0:09:08.315 --> 0:09:08.825 years? 0:09:08.835 --> 0:09:12.445 Well, first of all, when I said the banks have 0:09:12.445 --> 0:09:15.755 not done as much on technology and digital, uh, I 0:09:15.755 --> 0:09:17.955 have to add they have not done as much on 0:09:17.955 --> 0:09:20.594 data and um AI either. 0:09:21.119 --> 0:09:22.960 I mean they have, don't get me wrong, banks are 0:09:22.960 --> 0:09:25.719 fundamentally different, but they've not done as much as they 0:09:25.719 --> 0:09:28.400 could and should have. I remember banks had a head 0:09:28.400 --> 0:09:31.280 start in the 80s and 90s, the biggest users of 0:09:31.280 --> 0:09:34.119 data were the banks in the credit card systems. And 0:09:34.119 --> 0:09:37.590 so by, you know, 2010, 2020 to figure that banks 0:09:37.880 --> 0:09:40.108 don't have the right data, don't have the right data lakes, 0:09:40.200 --> 0:09:43.799 don't have the right data protocols, uh that's telling. But 0:09:43.799 --> 0:09:45.840 so part of the answer isn't that the banks just 0:09:45.840 --> 0:09:48.000 did not do as much as they could have. 0:09:48.760 --> 0:09:51.250 But the second part of the answer is I don't 0:09:51.250 --> 0:09:54.209 think it's across the board. It depends on the region 0:09:54.210 --> 0:09:56.919 of the world. I will tell you that in India, 0:09:57.130 --> 0:09:59.549 the largest outreach to the unbank has been the State 0:09:59.549 --> 0:10:03.130 Bank of India. The Prime Minister Jandar Najar now with 0:10:03.130 --> 0:10:05.640 300 million new accounts is all State Bank of India, 0:10:05.890 --> 0:10:08.169 and they do it all digitally on a mobile phone, 0:10:08.489 --> 0:10:10.450 and the unsecured lending on Euro is all on a 0:10:10.450 --> 0:10:14.030 mobile phone. Uh, in Indonesia, the largest amount of unbanked 0:10:14.030 --> 0:10:15.329 outreach growth is BRI. 0:10:15.809 --> 0:10:18.640 And they still continue to be the largest footfall and 0:10:18.640 --> 0:10:22.718 footprint and they're adding customers at scale in China. The 0:10:22.719 --> 0:10:26.599 policy banks, including Agature Bank of China, etc. are still 0:10:26.599 --> 0:10:29.699 doing a lot of this. So in many countries, the state, the, the, 0:10:29.760 --> 0:10:34.679 the banking, the the treasure banking sector is indeed leaning in. Now, 0:10:35.080 --> 0:10:37.520 to the extent that, you know, they're not doing as 0:10:37.520 --> 0:10:40.380 much and they haven't done, uh, new stuff like in 0:10:40.380 --> 0:10:42.559 Alibaba did or some of the new Fintechs did. 0:10:43.070 --> 0:10:45.309 Uh, that links back to my first comment. Some of 0:10:45.309 --> 0:10:48.669 the fintechs were more advanced about use of data and 0:10:48.669 --> 0:10:51.969 about use of ecosystems where they were able to garner 0:10:51.969 --> 0:10:54.669 some of that data. My views in the future, it 0:10:54.669 --> 0:10:58.228 doesn't matter whether you're a traditional bank or you're a FinTech. 0:10:59.380 --> 0:11:02.369 It really matters how much progress you've made in terms 0:11:02.369 --> 0:11:06.140 of thinking about data and analytics, how you rethought your 0:11:06.140 --> 0:11:10.289 credit underwriting process, how you rethought your portfolio management process, 0:11:10.739 --> 0:11:13.539 and then you could be an e-commerce company, a telco 0:11:13.539 --> 0:11:17.770 or Fintech or a bank. If you cracked that puzzle 0:11:17.770 --> 0:11:20.169 and you know how to be where the customers are, 0:11:20.539 --> 0:11:22.530 you will win many of these games. 0:11:23.650 --> 0:11:28.599 Uh, putting aside the data issue, um, just from a 0:11:28.599 --> 0:11:32.919 risk management perspective, despite all these buzzles, various iterations, and 0:11:32.919 --> 0:11:35.080 so on, we still have a regional banking crisis which 0:11:35.080 --> 0:11:37.369 seems like a very one on one type crisis, you know, 0:11:37.440 --> 0:11:40.359 duration risk and this bank get caught. Um, does that 0:11:40.359 --> 0:11:42.280 mean that we haven't really made that much progress on 0:11:42.280 --> 0:11:42.478 risk 0:11:42.479 --> 0:11:43.109 management? 0:11:43.320 --> 0:11:46.718 Well, first of all, the banks which went through the 0:11:46.719 --> 0:11:49.840 regional crisis were not subject to the Basel rules, so 0:11:49.840 --> 0:11:50.840 you've got to understand that. 0:11:51.309 --> 0:11:56.500 Uh, because the Fed gave them a pass, they weren't 0:11:56.500 --> 0:11:58.700 doing all the things the big banks were. So I 0:11:58.700 --> 0:12:00.380 do believe that all the banks that have gone through 0:12:00.380 --> 0:12:04.619 the Basel regime are fundamentally safer and better managed than 0:12:04.619 --> 0:12:07.689 in the past, and you see less of that, uh, 0:12:08.020 --> 0:12:11.299 but the question, will there still be risk in banks? 0:12:11.380 --> 0:12:14.380 Of course they will. The nature of banking is that 0:12:14.380 --> 0:12:17.440 you intermediate time and you intermediate risk, and I don't 0:12:17.440 --> 0:12:18.700 think that's going to change, uh. 0:12:20.919 --> 0:12:23.520 Would you believe that only banks have the risk, the 0:12:23.520 --> 0:12:26.199 other fintechs and other people who are intermediating finance will 0:12:26.200 --> 0:12:28.719 never have risk. I refuse to believe that either. So 0:12:28.719 --> 0:12:30.598 if you look at the history of the last 5 years, 0:12:30.679 --> 0:12:33.239 you could argue that the regional banks or Credit Suisse 0:12:33.239 --> 0:12:35.919 was one set of problems, but I could equally name 0:12:35.919 --> 0:12:39.840 to you half a dozen new fintech companies, token companies, 0:12:39.919 --> 0:12:44.159 tech companies, you know, etc. etc. who also had different 0:12:44.159 --> 0:12:44.960 kinds of problems. 0:12:45.510 --> 0:12:48.130 Uh, so the challenge is quite fundamentally this that when 0:12:48.130 --> 0:12:50.929 you have provided the capital use the capital, somebody sitting 0:12:50.929 --> 0:12:55.409 in the middle, intermediating intermediating risk and time, no matter 0:12:55.409 --> 0:12:57.609 how smart you are and no matter how forward looking 0:12:57.609 --> 0:13:00.489 you are, you will wind up from time to time 0:13:00.489 --> 0:13:04.039 stubbing your toes. To me, the analogy is, you know, 0:13:04.619 --> 0:13:06.530 any country, even though you say you have a great 0:13:06.530 --> 0:13:09.080 police force and you have a great legal system and judiciary, 0:13:09.289 --> 0:13:11.049 you name me one country that doesn't have crime. 0:13:11.630 --> 0:13:13.869 This is like trying to argue that if you do 0:13:13.869 --> 0:13:15.510 your job really well, there should be no crime in 0:13:15.510 --> 0:13:17.109 the country, and that can never be. 0:13:18.340 --> 0:13:21.059 Sure, um, I'm sort of conscious of, you know, the 0:13:21.059 --> 0:13:23.978 whole duration risk question even in 2025, 2026 with all 0:13:23.979 --> 0:13:25.900 the noise around the US, but we'll, we'll keep it 0:13:25.900 --> 0:13:28.340 to the past and the future as opposed to the 0:13:28.340 --> 0:13:31.609 conjuncture because I want good shelf life out of this podcast. 0:13:31.690 --> 0:13:36.710 But one question on the dialogue between regulators and banks. 0:13:36.940 --> 0:13:40.369 Do they listen? And is it a two-way communication? 0:13:40.900 --> 0:13:43.460 Again, you know, there's no one size fits all answer, 0:13:44.299 --> 0:13:46.289 it's a function of where you are. 0:13:47.030 --> 0:13:50.760 Um, um, taking a third step at the same thing, 0:13:50.770 --> 0:13:53.609 I think in the West, um, the US as well, 0:13:53.650 --> 0:13:57.919 but certainly all over Europe, UK, etc. the dialogue between 0:13:57.919 --> 0:14:03.089 the banking system and the regulators was more broken for 0:14:03.090 --> 0:14:05.650 an extended period of time. There was a going in 0:14:05.650 --> 0:14:10.210 belief that banks needed to be uh carefully and closely managed, 0:14:10.530 --> 0:14:14.760 and a high degree of suspicion about banks' motivations and capabilities, both. 0:14:15.130 --> 0:14:16.330 I never saw that in Asia. 0:14:16.909 --> 0:14:20.739 Um, right from, you know, the 9 when I first 0:14:20.739 --> 0:14:23.659 took on my job, by and large Asian regulators have 0:14:23.659 --> 0:14:27.419 been constructive in dialogue. They've been forward looking. They've tried 0:14:27.419 --> 0:14:30.950 to keep a developmental hat along with their regulatory hat, 0:14:31.630 --> 0:14:35.659 and even in Asia, obviously, you know, it changes a 0:14:35.659 --> 0:14:38.109 little bit in degree depending on which country you're in. 0:14:38.340 --> 0:14:41.140 But broadly speaking, you've not had the same degree of 0:14:41.140 --> 0:14:45.619 antagonistic engagement as you've had in several countries in the West. 0:14:46.190 --> 0:14:49.260 Now even in the West I think the dialogue is 0:14:49.260 --> 0:14:51.380 beginning to change a little bit in the last few 0:14:51.380 --> 0:14:56.020 years um as uh more and more regulators are beginning 0:14:56.020 --> 0:14:59.020 to see the world is progressing in a direction of 0:14:59.020 --> 0:15:03.299 a tokenized economy, new ways of making payments, etc. and 0:15:03.299 --> 0:15:05.419 they realize they have to engage the private sector more 0:15:05.419 --> 0:15:09.340 constructively and so it's beginning to happen, uh, but again 0:15:09.340 --> 0:15:11.690 I said that it's not entirely changed yet. 0:15:12.760 --> 0:15:16.320 Are you surprised or you think it's par for the course, 0:15:16.359 --> 0:15:19.119 the kind of credit losses we have seen on the 0:15:19.119 --> 0:15:22.039 portfolio banks from exposure to China? I mean, China has 0:15:22.039 --> 0:15:25.239 slowed quite dramatically in the past half a decade. Would 0:15:25.239 --> 0:15:28.239 you have expected even bigger repercussion, or do you think 0:15:28.239 --> 0:15:31.070 what has happened is pretty par for the course? 0:15:35.609 --> 0:15:38.109 Well, given the, my first I got to figure out 0:15:38.109 --> 0:15:40.669 two things about China. One is China slowed, but it's 0:15:40.669 --> 0:15:44.299 still growing at 45%. I do not see a steep recession. 0:15:44.630 --> 0:15:47.830 You're not seeing a complete falling off the cliff. So 0:15:47.830 --> 0:15:50.349 most countries in the world at 4 5% growth rates, 0:15:50.359 --> 0:15:52.989 you see some pain, but you know it's not a 0:15:52.989 --> 0:15:55.380 huge amount of pain. So you've got to start with that. 0:15:55.739 --> 0:15:58.070 China is in a relative sense slower, but in an 0:15:58.070 --> 0:16:01.109 absolute sense it's still growing, um, decently. 0:16:01.750 --> 0:16:09.130 Uh, the second thing about um the China situation is that, um, 0:16:09.380 --> 0:16:13.289 a large part of the credit in the system, um, 0:16:13.299 --> 0:16:17.609 is still benefited by some form of state support and therefore, 0:16:17.820 --> 0:16:21.260 whereas in the US system, by and large, you know, 0:16:21.340 --> 0:16:25.580 all the rocks show up as soon as the tide 0:16:25.580 --> 0:16:28.780 starts receding in the China system all the rocks don't 0:16:28.780 --> 0:16:29.940 show up immediately. 0:16:30.369 --> 0:16:32.669 So it could well be that you know some things 0:16:32.669 --> 0:16:36.460 are turned out 1015, 20 years in any other environment 0:16:36.460 --> 0:16:39.969 you would, you know, call them credit losses but uh in, 0:16:40.020 --> 0:16:42.580 in more supportive environments you can just term out of 0:16:42.580 --> 0:16:44.979 credit so maybe there's some of that um going on 0:16:44.979 --> 0:16:52.010 as well. um, however, even if you account for all that, um, 0:16:52.219 --> 0:16:54.460 the fact is that the total credit losses in China 0:16:54.460 --> 0:16:56.780 have been lower than one would expect. 0:16:57.219 --> 0:16:59.619 Even if you take the real estate sector, where you 0:16:59.619 --> 0:17:02.890 should expect to see the biggest damage, there has been some. 0:17:03.669 --> 0:17:07.349 Um, but not so much in the bank books. There's 0:17:07.349 --> 0:17:09.438 been some in the bank books. A lot of it 0:17:09.439 --> 0:17:12.438 is in the financial markets, the bond space, bondholders, etc. 0:17:13.189 --> 0:17:15.750 So one, this speaks to the fact that the banking 0:17:15.750 --> 0:17:18.109 system has changed a bit. So banks are holding less 0:17:18.109 --> 0:17:21.270 of the risky assets. The financial markets are holding uh 0:17:21.270 --> 0:17:23.390 more of the risky assets, and so there's been a 0:17:23.390 --> 0:17:26.659 fundamental shift in the nature of the banking system, um, 0:17:26.790 --> 0:17:29.430 as well. I should have mentioned that when you asked 0:17:29.430 --> 0:17:32.829 about how the banks changed. See, in truth I sometimes 0:17:32.829 --> 0:17:33.310 reflect that. 0:17:34.339 --> 0:17:39.089 It's not that financial sector risk um has disappeared, uh 0:17:39.089 --> 0:17:42.699 but the risk in the formal regulated banking sector is 0:17:42.699 --> 0:17:45.540 lower because it's been squeezed out and so some of, 0:17:45.569 --> 0:17:48.250 some of the risk is just shifted out. uh, why 0:17:48.250 --> 0:17:51.089 is private credit such a big market today? right? It's 0:17:51.089 --> 0:17:54.130 a big market because banks are refusing to put on 0:17:54.130 --> 0:17:57.250 that kind of credit.30 years ago, banks would have been 0:17:57.250 --> 0:17:59.930 doing structuring and putting on the credit, the banks don't. 0:18:00.369 --> 0:18:02.989 Uh, project finance. So large nature of the financing has 0:18:02.989 --> 0:18:05.949 become prohibitive for banks to do and they get squeezed 0:18:05.949 --> 0:18:09.188 out to the non-bank world, right? And therefore, when the 0:18:09.189 --> 0:18:12.589 losses are, are seen also, it's also proportionate. You see 0:18:12.589 --> 0:18:14.109 less of it in the banking sector. 0:18:14.400 --> 0:18:16.339 And perhaps more of it in the nonbank world. 0:18:16.709 --> 0:18:19.469 Let me expand on that issue because I'm really curious 0:18:19.469 --> 0:18:22.670 about that. So what's your sense? Are we pushing risk 0:18:22.670 --> 0:18:24.709 to the private side, which is by definition a little 0:18:24.709 --> 0:18:27.669 more opaque than the banking system balance sheet, and is 0:18:27.670 --> 0:18:30.260 that something that you're uncomfortable with? 0:18:30.550 --> 0:18:32.150 Well, I do think there's no question, of course we 0:18:32.150 --> 0:18:33.630 push this out to the private side. 0:18:33.949 --> 0:18:36.020 You look at the relative size of the private pockets, 0:18:36.099 --> 0:18:40.920 both private equity and private debt today. It's extraordinary. So 0:18:40.920 --> 0:18:43.218 you look at the total intermediary capital and see how 0:18:43.219 --> 0:18:45.829 much they move from public markets and the former regulated 0:18:45.829 --> 0:18:49.579 banking sector to the other side. It's huge, and which 0:18:49.579 --> 0:18:52.379 can only mean that there's more activity, action, and nature 0:18:52.380 --> 0:18:54.020 of risk happening over there as well. 0:18:54.810 --> 0:18:55.319 Um, 0:18:56.020 --> 0:18:59.790 Am I uncomfortable with it? See, the argument that some 0:18:59.790 --> 0:19:02.448 would make, you know, Macro and a reporter makes it 0:19:02.449 --> 0:19:07.170 very compellingly that people who fund those private side sectors 0:19:07.170 --> 0:19:10.010 do it with their eyes open and therefore there's better 0:19:10.010 --> 0:19:12.890 duration match. People come in recognizing that they're going to 0:19:12.890 --> 0:19:16.170 be in there for 678 years. So when private credit, 0:19:16.290 --> 0:19:19.650 private equity puts money for 678 years, it is match funded, right. 0:19:20.109 --> 0:19:24.390 Whereas in the regulated sector, the household savers come in 0:19:24.390 --> 0:19:27.680 with short term expectations. They put money into savings accounts 0:19:27.680 --> 0:19:30.250 and therefore need to withdraw money in a in a hurry. 0:19:30.510 --> 0:19:32.619 And therefore, when the bank takes on the same nature 0:19:32.619 --> 0:19:35.379 of the 678 years, this is putting on duration gap. 0:19:35.780 --> 0:19:38.010 I think I have some sympathy for that argument that 0:19:38.010 --> 0:19:40.790 when people are going into a fund with their eyes 0:19:40.790 --> 0:19:42.709 open saying it's a 6 year fund or a 7 0:19:42.709 --> 0:19:45.349 year fund or a 7 + 1 + 1, by 0:19:45.349 --> 0:19:48.349 nature you've shifted the risk to the investor depositor. 0:19:49.300 --> 0:19:52.380 Now, having said that, I think that on paper the 0:19:52.380 --> 0:19:57.089 investors deemed to understand that risk. In reality, I found 0:19:57.089 --> 0:20:01.930 that most investors, when, um, you know, things get bad, 0:20:02.359 --> 0:20:04.099 turn around and say we don't know, and they wind 0:20:04.099 --> 0:20:06.260 up standing in front of the same doors whether there's 0:20:06.260 --> 0:20:09.699 the regulator or the politician or the bank saying hey 0:20:09.699 --> 0:20:11.979 we did not know we were misled and we need 0:20:11.979 --> 0:20:13.179 somebody to make us go right. 0:20:14.119 --> 0:20:17.479 So this happened with Lehman mini bonds in the '09 crisis. 0:20:17.520 --> 0:20:19.879 It happened to a large extent in China with the 0:20:19.880 --> 0:20:23.800 P2P lending crisis. So I've seen this repeatedly that people 0:20:23.800 --> 0:20:26.839 think that the risk is better understood, but actually it's 0:20:26.839 --> 0:20:30.199 never better understood. And therefore by squeezing the discount and 0:20:30.199 --> 0:20:32.479 leaving it there, I do think that the fair amount 0:20:32.479 --> 0:20:36.280 of residual risk, which is not adequately thought through or 0:20:36.280 --> 0:20:36.989 accounted for. 0:20:37.640 --> 0:20:40.030 So I find it interesting that we always worry about, 0:20:40.040 --> 0:20:43.359 you know, depositor funds and the need to insure depositors. 0:20:43.479 --> 0:20:47.270 That has systemic implications, but a large asset price decline 0:20:47.270 --> 0:20:50.310 also has systemic implications. But somehow we don't worry that 0:20:50.310 --> 0:20:52.680 much about, you know, controlling that risk, but we always 0:20:52.680 --> 0:20:54.510 worry about the deposit side of the business. 0:20:54.750 --> 0:20:57.069 That's my point. I mean the assumption is that the 0:20:57.069 --> 0:20:59.750 large asset pools are held by rich people who know 0:20:59.750 --> 0:21:03.829 what they're doing, so you know everywhere. In reality, it 0:21:03.829 --> 0:21:05.020 doesn't always work that way. 0:21:05.479 --> 0:21:07.680 Well, they're the ones with, I guess, bigger purse strings 0:21:07.680 --> 0:21:12.089