Earlier this year, we saw the collapse of Silicon Valley Bank and Silvergate Bank following a run on deposits and big losses on their portfolios of bonds. Since then, regulators have been discussing changes to existing bank regulation, prompting existential questions about the future of the US lending landscape. But there are other risks lurking in the banking system too — including those created by new technology and changing business models. In this episode, recorded live at Money 20/20 in Las Vegas, we speak with Michael Hsu, the acting comptroller of the Office of the Comptroller of the Currency. He talks about banking regulation, crypto contagion, the rise of banking-as-a-service (BaaS) and the supply chain of payments. This transcript has been lightly edited for clarity.
Key insights from the pod:
The different US banking regulators — 5:05
The OCC’s view of stablecoins — 9:02
Crypto contagion to banks — 11:35
OCC interest in tokenization — 12:59
Guidance on third-party relationships — 18:05
The risks of third-party vendors — 22:21
The ideal structure of the US banking system— 27:46
Merger guidance post-SVB — 29:36
Could we have a Bank of Apple? — 30:39
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Tracy Alloway (00:10):
Hello, and welcome to another episode of the Odd Lots Podcast, I'm Tracy Alloway.
Joe Weisenthal (00:15):
And I'm Joe Weisenthal.
Tracy (00:16):
So, Joe, we've had a busy few months.
Joe (00:19):
Yeah, we really did, we were all over. We crisscrossed the country. We did all three coasts: East Coast, California, the third coast, Texas. We went to California twice in about three weeks, I think, but we have a nice little break now.
Tracy (00:35):
Yes, I for one am grateful to not be living out of a suitcase for a while, but our last stop in the whirlwind America tour was in Las Vegas.
Joe (00:47):
Oh, that was so fun. I loved going to Vegas. I love Vegas. It was so cool that I got the opportunity to join you in Las Vegas.
Tracy (00:55):
Okay listeners, this is where we're going to get into a little bit of an argument.
Joe (00:59):
You're going to hear Odd Lots co-hosts air some dirty laundry.
Tracy (01:03):
The day before, no, the day he was supposed to actually fly out to Las Vegas, Joe changed his mind. You decided Vegas isn't for you.
Joe (01:12):
So listeners, I love Vegas. It's one of my favorite cities in the country. I like playing poker, I love the Strip, I love the lights, I love the water consumption in the desert. I was really excited and then I got to the airport on this really nice fall day...
Tracy (01:25):
He wasn't feeling it.
Joe (01:26):
No, it's not true. I got to the airport on this really nice fall day, and about 30 minutes after I got to the airport, my flight was pushed back about five hours and I was only going to be in Vegas for 24 hours as it was, and I wasn't even sure that the flight was going to take off when they said because actually it was the second delay at the time. And I did have family in town, which is also true. And Tracy was already out there. And Tracy is a very capable co-host, more than capable co-host. More than capable.
Tracy (01:57):
Sounds like a lot of excuses, Joe.
Joe (01:59):
And I said ‘Please, Tracy, can you just do this? Can you just do me a solid and do this episode by yourself?’ And Tracy without any complaint or frustration
.
Tracy (02:06):
At the time I didn't complain. I complained when I came back.
Joe (02:09):
And not making me feel bad about myself, obliged.
Tracy (02:13):
Let me just say the world's smallest microscope would not be able to locate my sympathy for this argument.
Joe (02:20):
You know what?
Tracy (02:22):
No, okay, let's leave there.
Joe (02:23):
Nevermind.
Tracy (02:26):
Listeners, let me say though that you are in for a treat as is Joe, because he wasn't there, so this is the first time he's going to hear this interview. But we spoke, or I spoke with Michael Hsu, the Acting Comptroller of the Currency and we had a really interesting conversation. This was a live episode recorded on stage at Money 20/20, which you might know as the big sort of FinTech gathering.
We talked a lot about the intersection between banking and technology. And Joe, here's where it gets kind of Odd Lotsy because Michael has been arguing for a while that a lot of what's happening in banking right now, and particularly in payments, kind of looks like a supply chain. So a lot of banks are outsourcing different functions like payments to third party vendors and this presents a bunch of new and interesting problems and risks, and I guess also opportunities.
Joe (03:21):
It's so interesting to think about finance in this realm. And you can imagine how these things go in cycles, because you could imagine at some point these functions were very simple. It was all in-house, vertically, horizontally, integrated, and so forth. And then like many other areas of the economy, companies realize, ‘Okay wait, what if we have one specialty?’ Other companies then specialize in this specific thing. I remember we did that episode about community banks and how they had to outsource a lot of their own functions about cybersecurity and so forth, because they don't have maybe the capacity of a JP Morgan. So it is interesting to think about the supply chain of money in that respect.
Tracy (04:00):
Well, this is exactly it. So in one respect, it's a sort of natural evolution of the economy. Everyone becomes more specialized, everyone becomes more efficient, the business model becomes more streamlined. But as Michael points out, there are these sorts of new problems that are potentially thrown up by everyone outsourcing kind of critical functions in some respects. So without further ado take a listen to this live episode with Michael Hsu recorded in Las Vegas sans Joe at Money 20/20. Michael Hsu, Acting Comptroller of the OCC, thank you so much for coming on Odd Lots!
Michael Hsu (04:38):
Tracy, thanks so much for having me. Love the show and it's a real honor to be here.
Tracy (04:42):
Oh, I appreciate that. So I'm sort of in a reflective mood lately, and I used to be a banking correspondent. I covered a lot of FinTech back when people were super excited about it. I feel like they're not as excited about it anymore. This is a really embarrassing first question but what does the OCC do? How does it compare — I feel like there are so many different banking regulators.
Michael (05:05):
How much time do we have?
Tracy (05:05):
Well, there's the FDIC, there's the Fed, there's the OCC. Who's doing what? How often do you step on each other's toes?
Michael (05:12):
We coordinate a lot, let me put it that way. So the OCC regulates and supervises nationally chartered banks and federal savings associations. So just to put some numbers on that, it's about 1,100 banks. Now we've got over 4,000 banks in the banking system. But by assets, the largest banks tend to be nationally chartered, your JP Morgan Chases and your Citis of the world.
So by assets the OCC supervises and regulates about two thirds of the banking assets in the system. So you get a little bit of that 80-20 rule for national charter banks. Banks can have state charters and they can be members or not members of the Federal Reserve. So we have a complicated — actually your listeners might be interested in this, but maybe we'll spare them for this...
Tracy (05:58):
No, our listeners love detail.
Michael (06:00):
So there's a different kind of landscape, but we coordinate quite a bit at the federal level on all the major rulemakings because we want a level system. We want a level banking system. Now, I think what's really interesting about the OCC is historically, so we were founded in 1863 during the Civil War. And before the OCC, you had free banking and this is relevant for stablecoins.
Tracy (06:27):
They all issued their own currency. Yes, I remember this.
Michael (06:30):
So you had the Bank of Tracy and you had the Bank of Mike and the Bank of Joe and each bank would issue its own dollar. Different size, different color, but it would be a dollar. And so people were walking around with all these different notes, and in theory, they could go back to the Bank of Tracy and say ‘I want a dollar's worth of gold.’ And sometimes you had it and sometimes you didn't.
And so there would be discount rates on these dollars and so it was a mess. And you imagine like there's panic all the time. There's a lot of fraud and there were money men. People would walk, go around with bags full of money from town to town to exchange these dollars. Because, you know, if you're a farmer, you want to be able to do your business.
So during the Civil War, it’s like ‘Hey, we got to fund the war and we got to bring the union together.’ So they passed a series of laws, they've got now a greenback unified dollar and they create national banks to basically both issue those and then take deposits and basically buy Treasury bonds, which funds the war.
Tracy (07:29):
That's crazy. So the OCC was around even before the Fed?
Michael (07:32):
Yes, way before.
Tracy (07:33):
So you have one up on them.
Michael (07:35):
Well, and all we do is supervision. We are a very supervisory-focused agency and so we've got a long, deep history. And the stablecoin debate, this is less relevant now, but a lot of times folks are saying, ‘Well, why don't we want more? Don't we want stablecoins?’ And the stablecoin landscape now looks a lot like free banking because each of these issuers is different and they trade differently. I mean, if you go on and you look these things up, and it's not a long-term sustainable system.
Tracy (08:05):
Well, since we're on the topic of stablecoins, as our Bloomberg Opinion columnist, Matt Levine says often, it does seem like a lot of crypto and maybe some aspects of FinTech are learning the lessons of the financial system development sort of in real time. And on the topic of stablecoins, we did have a big collapse last year with Terra Luna.
You at the OCC have always taken a sort of cautious approach to stablecoins. What was it that kind of worried you about their development? What was it that you saw that made you think, wait a second and in some respects, it's kind of surprising because stablecoins were supposed to be the safest aspect of the crypto system. Then it turned out to be very problematic. Although, I guess you can say that about a lot of financial history, the ‘safest’ assets often turn out to be the problematic ones. What was it that made you take that cautious approach?
Michael (09:02):
So, if we back up a little bit, just the rise of crypto. So I became acting comptroller in May of 2021 and that year alone, crypto was just on a rocket.
Tracy (09:14):
That was a big year.
Michael (09:16):
That was a big year of growth for crypto in general, and stablecoins. And so there's a lot of hype, a lot of FOMO and it felt familiar to me because it felt a lot like derivatives and structured finance circa 2004, 2006.
Tracy (09:30):
You pool all this stuff and then you trade it as one-for-one.
Michael (09:33):
Gillian Tett’s got this great book, Fools Gold , and I recommend it to everybody because chapter one, innovation, chapter two, perversion, chapter three, crisis. The first innovations for credit default swaps were really, really good. They solved problems, it was amazing, it's great and then people are just innovating for innovation's sake. And then you have the high priests. Who understands this? Oh, only the PhDs who understand nuclear physics can actually explain the stuff.
It creates an environment where it can just kind of eat itself and so I had a feeling within crypto, maybe that's what's happening. So of course, I think we do what we do best in government, we dig in. What are the facts? Let's crack the thing open, try to understand this best we can. And the more we looked, the more worrying signs like this is not all it's cracked up to be. And especially with stablecoins, there was a big gap between the talk and the reality. So that just sets a whole bunch of flags up.
And so yeah, you're trying to telegraph very clearly to banks like look, if you're going to get into crypto, it's got to be safe, sound and fair. Do your homework, make sure you have those controls in place. And so for the banks that were, I call them crypto curious, and there were a lot at the time, they lost interest because I think they recognized that takes an awful lot of work. And then once the crypto winter happened, there was a big pullback from that.
Tracy (11:01):
Well, the one other thing I want to ask is stablecoins aside, we did see a little bit of contagion from the crypto turmoil of 2022 into the banking system. So notably we saw Silvergate collapse and I guess we can debate how much of that was due to pure crypto or other dynamics with deposit outflows and things like that. But does it feel to you, looking at the US banking landscape now in 2023, that there's enough of a barrier between regulated banks and crypto? There's enough of a sort of insulation there?
Michael (11:35):
So I'm going to knock on, I'm not sure if this is wood, I'm going to knock on it.
Tracy (11:39):
Our producer Carmen's going to kill you for making ambient noise during the podcast.
Michael (11:44):
The short answer is, I think so, and that's in part because across all the federal banking agencies. We've been very clear and unified about how we feel and what our expectations are about banks engaging in risky activities such as crypto. We've listed those risks out, we've provided interagency guidance. Again, it's not to say that banks can't do it but if a bank is going to do it, whatever it is, it's got to be safe, sound, and fair and they have to prove that to us.
We feel that that's very appropriate given what's taken place in the crypto space. Again, if you go back, I think the stats are about a billion dollars of fraud, two billion dollars of scams, and three billion dollars of hacks last year, that's a risky space. That's not to say everybody's bad, because that's not true. There are good players in that space, but it's a risky space and so we expect banks to do that work. And I think most banks, either they're doing that work or they decided it's just not really worth it.
Tracy (12:41):
So crypto is by no means a monolith, and even though you've taken a cautious approach to stablecoins, I get the sense that you're a little bit more interested in another aspect of crypto — tokenization. You're holding a big tokenization conference, right? What's the draw there?
Michael (12:59):
So the OCC is hosting a tokenization symposium on February 8th, mark your calendars, open to the public. Our keynote speaker is going to be Hyun Song Shin from the BIS. I know you and Joe like him.
Tracy (13:10):
An Odd Lots guest! One of our favorites.
Michael (13:12):
Hyun is fantastic because he's got a very broad perspective across both monetary policy, research, banking and all things kind of crypto digital assets related because at the BIS they've got the Innovation Hub, and there's a lot of intersection between his research and what they've been doing. In a word, there's been a growing divide between crypto and tokenization, in tokenization of real world assets and liabilities.
Most crypto is not backed by anything, Bitcoin, Ether, etc., or stablecoins. Tokenization is a different game. Crypto's retail-focused and most of the interest in those coins is based on a hope for speculative games. Tokenization is about solving a settlement problem and this is really, for your listeners, now we're in the plumbing of the system.
And for those who know, when you buy a share of stock, there's all this stuff that happens in the background. It involves multiple players, there's different handoffs, there's risk that gets transformed in different ways. It's complicated and it creates friction and it creates costs. So if there’s a way to make that settlement process better, why not? And I think that's the promise of tokenization, is that some of those risks and frictions can be addressed by basically taking messaging and settlement and combining that.
Tracy (14:36):
Wait, can you explain that a little bit further? Because when I think about tokenization, I presume these are centralized databases and then I think, well, what's the difference between a tokenized central database versus an Excel spreadsheet that's password protected? What is the innovation here?
Michael (14:56):
So this is a very important point. Blockchain — note, I didn't say blockchain.
Tracy (15:00):
No, you didn't.
Michael (15:01):
And I think that's a very important distinction. I think there's been a little bit of a, what's the best way to put it? It's almost a Rorschach test. You say blockchain, and some folks think ‘Oh, that's the next big thing,’ whether they understand it or not. Like ‘Oh, it's super efficient and fast,’ but it’s not super efficient or fast.
Tracy (15:18):
I mean, I remember the years when we were going to put everything on the blockchain — like groceries or balsamic vinegar was going to be traceable on the blockchain to make sure it came from a specific region and things like that.
Michael (15:31):
Right, and so the design of public blockchains, there were certain reasons for doing it. If you go back to the Satoshi Nakamoto white paper, that paper is pretty fascinating. It's a really interesting paper, and it makes the case for why you should do something that way.
But to your point, Tracy, if the problem you're trying to solve is settlement frictions, you don't need that. And in fact, that probably just slows things down and gums things up. There are better ways to do that. Now what's the innovation? That's your question. What's the innovation? It's basically taking messaging and settlement and combining it.
That's different because right now, when you, again, we'll use the example when you buy a share of stock, you're sending a message to buy a share of Tesla or something, and then that message goes, and then a bunch of other things have to happen before that thing actually settles. Your money gets transferred, you get a share of stock, and that's held somewhere. And you have, everyone's fully aware that that has happened with tokenization. You actually collapse a lot of those steps into a single thing.
Tracy (16:34):
Oh, I see. So multiple processes can exist as sort of like one thing that can then move through the system and be verified.
Michael (16:41):
Exactly and for the banking nerds and the payment nerds out there, this is exciting. Now, it's hard to tell this story to a retail because it’s hard to see that difference. But those costs and those frictions add up, and there's quite a bit of time and effort that gets put into identifying, addressing, assessing, managing those risks and frictions. For the regulators and the central banks that have been kind of interested in this space, more of the excitement going forward is really in this kind of tokenization space, rather than in the retail space, which I think has been colored by a lot of the recent crypto events.
Tracy (17:40):
Well, since we're on the topic of financial innovation, and we are essentially at a FinTech conference, we're at Money 20/20. I wanted to ask you about a recent publication from the OCC. It's the Interagency — it has a very catchy name — The Inter-Agency Guidance on Third Party Relationships. Is that just basically a way of saying that you're worried about FinTech partnerships with the banks?
Michael (18:05):
So the guidance is broader than just that, but you’re onto something. So let me just zoom out for a second. That guidance is geared towards banks' relationships with any vendors, any third parties.
Tracy (18:17):
So payments as well, and things like that.
Michael (18:19):
Payments but a bunch of others as well. The story I like to tell is that way back in the beginning, all of banking was done by banks. And so you can imagine there's like a box and you can label that banks and banking, it was the same box. They did everything by themselves and then over time they had to rely on others to do certain things.
And probably the clearest example is with the core processors. A lot of banks rely on the core processors to do certain processing, accounting, reconciliations, etc. And so now there's a dependency. And so as a regulator, you say ‘How do I ensure that everything that that bank does is safe, sound, and fair? Oh, I need to make sure that what they've done with that third party is up to snuff.’ If it's slipshod, if it's done sloppily things can break. Then the bank will say ‘Oh, that wasn't my fault’ and they'll blame it on someone else. But at the end of the day, the bank itself is not going to be safe. We don't have a safe and sound system.
So we want to make sure that that standard kind of carries through. It's almost an extension of the bank, if you will. That's 101. Now we fast forward to today. Now it's way more complicated because not only do you have lots of different kinds of vendors, like a lot of banks are now saying ‘Hey, why stop with cores? We can do this with a lot of [things], because our comparative advantage is different from a lot of the technology that's out there.’
There's a whole bunch of different use cases in terms of vendors. Now the tables are being turned. Now you've got some FinTechs that are going to customers saying ‘We will be the interface with you to take a deposit, make a loan, etc. but we need a bank to actually do that.’ And so then they go to the bank. So in a sense, the bank is the provider. That's why it's banking-as-a-service. The bank is providing that service, but the dependency is flipped around.
Tracy (20:04):
Yeah, we used to talk about the disintermediation of banks and — someone brought this up in our Discord recently — apparently, I wrote an article which I'd forgotten...
Michael (20:15):
Oh yeah, I do that all the time.
Tracy (20:16):
When there was all that excitement about peer-to-peer lending or direct lending, Wells Fargo apparently put out a notice to its employees saying ‘Please do not invest in peer-to-peer lending because they're a direct competitor to us.’ The whole idea was to cut out the banks and people could make loans to each other. But now it's almost like disaggregation. We're disaggregating the banks, we're sort of taking pieces away or there are new players, new companies that are tapping the banks for specific pieces. It's all very confusing.
Michael (20:47):
Well, it's confusing, but there's a logic to it. And so the analogy I like to draw is if you go back to pre-2008, capital markets disintermediated banking. It was really the lending and the deposit taking. Money funds took deposit taking and securitization took lending.
Tracy (21:04):
By the way, this is how you get a financial journalist's attention when you say, here's a pre-2008 analogy. I'm all ears, I’m like ‘yes, tell me.’
Michael (21:13):
So if you drew a picture, and one of my favorite pictures of this Zoltan Pozsar, who is another Odd Lots guest.
Tracy (21:19):
Another Odd Lots favorite!
Michael (21:21):
He drew this map.
Tracy (21:22):
His famous map that he had pinned on the wall of the New York Fed.
Michael (21:26):
I mean a bunch of folks had this map pinned. It was a gigantic map and again, for the nerds on the podcast, it was basically T-accounts: assets, liabilities, equity, but for different points of the system. And it did what any good financial [research should do] — follow the money. You just follow the money.
Tracy (21:44):
Right. How it's moving through the banking system — and the shadow banking system at that time.
Michael (21:48):
So Zoltan and then Adam Ashcraft was a co-author on the shadow banking paper, which basically said what banks used to do as lenders has now been broken up into six pieces or multiple pieces and each piece is being done by a different group. So origination, remember New Century and Option One? They would do originations for mortgages — warehouse lending. Someone else would do warehouse lending. Distribution, someone else would do distribution. And you'd look at that and say ‘Well, does that make sense?’ Well, there's a specialty there and maybe they're particularly good at that and there's economies of scale.
Tracy (22:19):
They would argue efficiency.
Michael (22:21):
Right, efficiencies and so you'd say that logic in and of itself on a microscale made sense. It's only when you zoomed out and you looked at the whole thing that you said ‘Oh, does this hold?’ I think the real insight from the Pozsar-Ashcraft work was that all the Fed facilities matched up to each of those points. So it’s almost like the discount window was recreated for what had been disintermediated, which is quite intuitive actually.
So it gets back to this idea I have, which I think others have talked about: you've got the conservation of matter. Risk is neither created nor destroyed. It can transform and be chopped up and reallocated, but it all adds up to the same thing.
And so now we fast forward to today, and this is what's happening with payments. And if you talk to the payments companies, they say it doesn't make any sense to basically have a full system, front to back on this. You want to slice it up because different companies do a different job on things where they're better at it. So it's very similar logic to the capital markets business remediation.
And again, each point makes sense when you do it one by one but when you zoom out, what does it look like and what's the risk reward? And who's bearing what risk?
Tracy (23:37):
So just on this point, I mean, maybe I'm reading too much into the 2008 analogy, but one of the reasons it all went off the rails is because as you had all these different entities doing different things, there was kind of less and less return for all of them and so the temptation was to start levering it up and try to amplify whatever yields you could get.
Is that the risk here? Or I guess, talk to us concretely about the risks. And then secondly, is there enough return to actually go around because when I look at all these different little pieces of banking services, it feels like there are so many players all kind of offering similar things.
Michael (24:18):
I think that's a very, very valid question and I know there are some both FinTech and bank analysts who have kind of looked into this and they're raising very similar questions. Is there enough to go around to support such a complex ecosystem?
But let's take a step back. Let's go back to banking as a service. With banking as a service, there's a spectrum, and at one end of the spectrum, you'll have what I think of as something that's relatively simple. You've got a FinTech, they've got a really cool app targeted at a population that they're really familiar with, they know it's going to work and you've got a bank who traditionally doesn't know how to engage or to acquire that customer. So they partnered together and they said ‘Let's go get that customer together.’ And the bank says ‘That customer is my customer as much as it is yours.’
They apply all the KYC and the compliance and all of the bells and whistles that they would provide to any other customer is applied to that customer. Very simple, hard to scale, but relatively simple, straightforward. Then what's the rev split between those two and they can negotiate that.
At the other end of the spectrum, you've got banks. Who do they deal with? This is too complicated, we just want to provide banking as a service but we want to do it at scale. And lo and behold, there's some companies out there, this is what they do. Often they're referred to as middleware and they'll say ‘Well, if you come to us, we have partnerships with lots of Fintechs,’ and they tell the Fintechs that we have partnerships with lots of banks.
Tracy (25:42):
It's funny there's ware all the way down, right? It’s so funny.
Michael (25:46):
Yes. And so they go to them, and again I don't want to paint all of them with a broad brush. There is a spectrum on this, and some of it is done in a way that I think can be safe, sound and fair. And others we've seen are not the case and so in those instances, the bank has no idea who the real customer is and the FinTech is like ‘Well, look, we don't do compliance, we don't do KYC, someone else should handle that.’
So we're right back to this picture of each slice doing something slightly different. And in my experience where that happens, unless there's a lot of clarity about who's bearing what responsibility, when bad things happen, everyone's pointing at each other and that's a mess. We don't want that and it's really important for us as this ecosystem evolves and we've got an eye on that and we guide it towards things that are healthy because there is good innovation out there that can be incorporated into the banking system. But we want to make sure that we don't end up with this kind of patchwork, disintermediated, disaggregated mess.
Tracy (27:03):
Since you are the oldest banking regulator in the US, I wanted to ask you a little bit about the banking landscape post-SVB and one thing that it feels to me that regulators are still sort of grappling with is what they want the banking system to look like? Do you want a sort of Canadian style system where you have six mega banks and everyone banks with them and they're highly regulated? Or do you want the sort of vibrant, It’s a Wonderful Life-style banking system where there's local banks everywhere and everyone knows you and your banker will personally extend you a loan and things like that. Where does the OCC fall on that debate? Do you have a vision of what you want?
Michael (27:46):
I get this question a lot, and it's half a loaf of a question and the reason I say that is because it's just like you said, the instinct of folks who are contemplating this usually say ‘There's too many banks. Four thousand is too many. What's the right number?’ Or they compare to other countries. And what it's missing is banks exist to serve people and communities and the economy.
What's missing from the question is, well, who are the people and communities in the economy that we're trying to support? The US is very different from Canada, right? We've got 330 million people. We've got a very diverse economy, lots of different communities and so that argues that we need to have an equally diverse banking system.
So it's almost like regulators — we love to think in terms of ratios. So the question of what the banking system should look like is the numerator. The denominator is what the economy looks like and as long as we have a really diverse economy, we need a really diverse banking system because one size doesn't fit all.
The large mega banks can't serve, and don't want to serve, all those different groups. I got into this debate yesterday with this one person about this long tail of cases in the US economy, we have a very long tail of different communities whether they're geographic or otherwise. And I think those are opportunities for banking. So then the question is, what is the best way to meet and empower all of them? That to me, that's the real central question of merger policy. How do we set up merger policy so that we're approving, we're considering mergers that empower those communities.
Tracy (29:28):
So I believe there was some discussion of updating the merger guidance post SVB to sort of get at this question. Is that still on the table?
Michael (29:36):
Yes, absolutely. It's on the table and it's taking some time, but it's because we want and we need to put people, communities at the center of that analysis. We've got statutory factors, we're kind of working through that and there's a lot of detail around that. But as long as we have that long tail, and as long as the US economy keeps growing, the banking system has to grow with the US economy.
So if you were to just graph US GDP and the size of the banking system, they pretty much match on top of each other. So as long as the US economy keeps growing and different parts of the economy grow, we want and need the banking system to grow with that. It's got to be safe, sound and fair.
And this is why I spend so much time on large banks, because there are going to be more and more complex large banks in the future. They need to be resilient, they need to be resolvable and they need to be manageable. And so we spend a lot of time like, let's articulate that so we don't get back into the pre-2008 pickle where you've got large banks that are neither resilient, resolvable or manageable. That's not a place that we can afford to be.
Tracy (30:39):
So since we're talking sort of existential questions for the US banking landscape, one of the things that's been on my mind, especially in the context of FinTech and I guess payments innovation and things like that, there is still a difference in the US between commerce and banking. And it's sort of ‘never the twain shall meet.’
Every once in a while there's a rumor that Wal-Mart wants to start a bank or something, and then it gets shot down because it's not allowed in the US. But I kind of wonder post-SVB, as banks continue to be disrupted by new digital technology, there are digital bank runs nowadays and things like that, would there be room for a Bank of Apple, for instance? Or a Bank of Amazon, or even a Bank of Berkshire Hathaway? I know it's not a tech company, but these are companies with huge amounts of money. Maybe it would be nice to have a really well-capitalized bank as interest rates are going up
Michael (31:37):
So you probably need an entire other podcast to talk about this. It's a fascinating question. The history of the blending of banking and commerce is not a good one.
Tracy (31:51):
Wasn't Wells Fargo a stagecoach operation? That seemed to work out okay.
Michael (31:55):
Where we have... I mean, if you go back to 2008, right?
Tracy (31:59):
I'm being facetious, but you're right.
Michael (32:00):
But we have lots and lots of examples where we said ‘Hey, wouldn't it be great if we took these things and you take the best of each and it's like the chocolate and the peanut butter, you put them together and we get something better. ‘And in almost every single case I can think of, it's ended quite badly.
And there's two problems that are associated with that, which we really have to be careful of. One is there does become an unusually high concentration of power — market power because the banking and the commerce reinforce each other in a way that's quite unfair. And that can have a lot of negative impacts. So that's one thing to be attentive to.
And the other is that the opportunities for problems go up because now how commerce goes, impacts banking. And again, that's outside of the zone of how safety and sound supervision typically goes. So that's why we've had this separation. I do think today, going forward, this is going to become a bigger and bigger question to deal with because payments by itself is commerce.
When you start to put it next to things that are adjacent to payments — lending, credit, deposits, savings, etc. — that's banking and this is very fluid. Rarely does the payments company say ‘We're just going to do payments and that's all we're going to do forever.’ At some point they say ‘Hey, wouldn't it be great if we just paid a little bit of yield on thi cash that's sitting with us. Wouldn't it be great if we did some lending?’
Tracy (33:27):
It's a slippery slope to being a bank. It’s happened to everyone!
Michael (33:31):
And so we want to be really attentive to that. And look, if there's a way to do it in a way that's going to be safe, sound and fair without financial stability concerns, I'm open. Let's talk about that. But history has proven that that's tough to do.
Tracy (33:44):
Alright, Michael Hsu, thank you so much for coming on Odd Lots. Really appreciate it.
Michael (33:48):
Thanks so much for having me.
Tracy (34:02):
Alright, well that was the live conversation recorded at Money 20/20 with the OCC’s Michael Hsu. Joe, do you regret not going?
Joe (34:11):
Tracy, you're so capable as a host and that is my conclusion. You're so capable as a host, you don't even need me and I think next year we're going to be sending you on the road for a lot of solo trips and I'll just hang back and tweet.
Tracy (34:23):
You flatter me to make yourself feel less guilty but that’s okay. I thought it was a super interesting conversation. Michael's a big Odd Lots fan, which was kind of fun and maybe we inspired him with the supply chain analogy. I hope so.
Joe (34:38):
Me too. I love it.
Tracy (34:39):
Alright, shall we leave it there?
Joe (34:39):
Let's leave it there.