Podcast Summary
Understanding Banking Through a Supply Chain Lens: Principal Asset Management leverages a 360-degree perspective to identify promising investment opportunities in real estate, combining local insights and global expertise. An interview with Michael Hsu, the acting comptroller of the currency, highlighted the evolving banking landscape, likening it to a supply chain.
Principal Asset Management, as a real estate manager, leverages a comprehensive 360-degree perspective, combining local insights and global expertise across various sectors like public and private equity and debt. Their teams use this combined knowledge to identify the most promising investment opportunities. During a podcast episode, hosts Tracy Alloway and Joe Wasenthal shared an anecdote about Joe missing a trip to Las Vegas for a recording due to flight delays. Despite the inconvenience, they managed to conduct an insightful interview with Michael Hsu, the acting comptroller of the currency, at Money 2020. Hsu discussed the intersection between banking and technology, suggesting that the current trends in banking, particularly in payments, resemble a supply chain. This perspective offers a unique way to understand the evolving banking landscape. Overall, the episode showcased the importance of adaptability and the power of combining local and global perspectives to identify opportunities in various industries.
Historical role of OCC in banking regulation and evolution of outsourcing trend: The OCC regulates and supervises nationally chartered banks and federal savings associations, overseeing approximately two-thirds of banking assets. The outsourcing trend in banking presents new risks but also opportunities for specialization, efficiency, and streamlined business models.
The outsourcing of various banking functions to third-party vendors presents new challenges and risks, but also opportunities for specialization, efficiency, and streamlined business models. The Office of the Comptroller of the Currency (OCC) plays a significant role in regulating and supervising nationally chartered banks and federal savings associations, overseeing approximately two-thirds of the banking assets in the system. Historically, the OCC was founded during the Civil War era when banks issued their own currency, leading to a complex system. Today, the OCC coordinates with other banking regulators to ensure a level banking system. The outsourcing trend in banking is a natural evolution of the economy, but it also brings new risks that need to be addressed.
The history of financial systems and innovation: Innovation in financial systems can lead to progress but also instability. The need for stable currencies and national banks during the civil war era, and the rise and fall of stablecoins today, serve as reminders of the importance of understanding potential risks and taking a measured approach.
The history of financial systems, whether it be during the civil war era or the present day with cryptocurrencies and stablecoins, shows that innovation can lead to both progress and instability. During the civil war, the lack of a stable currency led to chaos and the need for national banks and a unified dollar. Fast forward to today, the rise of stablecoins was seen as a solution to the volatility of cryptocurrencies, but the recent collapse of Terra Luna serves as a reminder of the potential risks. As the Office of the Comptroller of the Currency (OCC), we have a long history of supervising financial systems and have taken a cautious approach to stablecoins due to concerns of instability and potential risks, similar to the innovations in structured finance leading up to the 2008 financial crisis. It's important to remember that even the "safest" assets can turn out to be problematic. And as we continue to innovate in the financial sector, it's crucial to understand the potential risks and take a measured approach.
Crypto vs Tokenization: Safety and Security Concerns: Regulators expect banks to ensure safety, soundness, and fairness when engaging in crypto activities due to substantial risks like fraud, scams, and hacks. Tokenization, however, focuses on solving settlement problems and is backed by real-world assets and liabilities, gaining ongoing interest.
While crypto and stablecoins have gained significant attention and hype, there are serious concerns regarding their safety and security. The gap between the talk and reality in the crypto world has raised red flags for banks, leading many to lose interest. Regulators have been clear about their expectations for banks engaging in crypto activities, requiring them to ensure safety, soundness, and fairness. The risks, including fraud, scams, and hacks, are substantial. However, there's a growing divide between crypto and tokenization, with tokenization focusing on solving settlement problems and backed by real-world assets and liabilities. The OCC is hosting a tokenization symposium to explore this area further, highlighting the ongoing interest and potential of this aspect of crypto.
Streamlining Asset Settlement with Tokenization: Tokenization combines messaging and settlement into a single process, reducing frictions and costs in the financial industry
Tokenization offers a solution to the complex and costly settlement process involved in buying and selling assets by combining messaging and settlement into a single, streamlined process. This innovation, which is different from a centralized database, can significantly reduce frictions and costs, making it an exciting area for regulators, central banks, and industry experts. While it may be difficult for retail consumers to fully grasp the difference, the potential savings in time and resources make it a promising development in the financial industry.
Ensuring safe and sound vendor relationships in a complex financial system: Regulators like the OCC focus on maintaining safety and soundness in all bank vendor relationships, including fintech partnerships, as the bank's reputation and safety are at stake in the increasingly interconnected financial world.
As financial systems become more complex with the rise of fintech partnerships, regulators like the OCC are focusing on ensuring safe and sound relationships between banks and third parties. This is not just about fintech partnerships, but all vendor relationships. The analogy given was that banks used to do everything by themselves, but now rely on others for various processes. As a regulator, it's crucial to ensure that these dependencies are safe and sound. With the increasing number of use cases for vendors and the tables turning with fintechs needing banks for certain services, the dependency is being flipped around. This concept is known as "banking as a service." Regulators want to make sure that the standard of safety and soundness carries through to these relationships, as the bank's reputation and safety are at stake.
Financial industry disaggregation: New players handle specific pieces of lending and deposit-taking: The financial industry is breaking down into specialized roles, but it's important to consider the risk and reward implications and who bears the risk.
The financial industry is undergoing a process of disaggregation, where banks are no longer handling all aspects of lending and deposit-taking on their own. Instead, new players and companies are stepping in to handle specific pieces of the process, such as origination, warehouse lending, and distributions. This trend is reminiscent of the pre-2008 capital markets system, where money funds took deposit-taking and securitization took lending. While each piece may make sense on its own, the overall picture can be confusing, and it's important to consider the risk and reward implications and who is bearing the risk. The Fed has responded to this trend by recreating facilities for each disintermediated point in the system. Ultimately, risk is neither created nor destroyed, but can transform and be reallocated. Today, this trend is happening in the payments industry, where companies argue that it doesn't make sense to have a full system from front to back and instead prefer to slice it up and specialize. However, history shows that as more entities handle different pieces, there can be less return for each, leading to the temptation to leverage up and amplify yields. It's crucial to consider these implications when evaluating the current financial landscape.
Ensuring a clear and defined structure in banking and fintech partnerships: Effective partnerships between banks and fintechs require a clear definition of roles and responsibilities, while complex arrangements as banking as a service increase risks and necessitate transparency and clarity to maintain a secure and reliable ecosystem.
As the banking industry continues to evolve with the integration of fintechs and banking as a service, it's crucial to ensure a clear and defined structure to prevent a disjointed and risky ecosystem. At one end of the spectrum, simple partnerships between fintechs and banks can work effectively, with both parties sharing responsibilities and applying compliance measures. However, at the other end, where banks opt for a more complex approach by partnering with multiple fintechs and acting as middlemen, the risks increase significantly. In such cases, it's essential to maintain transparency and clarity about roles and responsibilities to prevent potential conflicts and ensure a secure and reliable system for all parties involved. This approach will not only create a healthy ecosystem but also enable the integration of innovative fintech solutions into the banking system.
American Express's Rewards Program and Diverse Banking System: American Express offers businesses four times points on top spending categories, while regulators focus on mergers that empower diverse communities and expand the safe, sound, and fair banking system.
American Express offers businesses the opportunity to earn four times points on their top two eligible spending categories each month, up to $150,000 in purchases per year. Meanwhile, in the banking landscape discussion, it was emphasized that the US economy's diversity calls for a diverse banking system that caters to various communities and sizes. Regulators are working on updating merger guidance to ensure approved mergers empower those communities. The growth of the US economy necessitates the expansion of the banking system, which must remain safe, sound, and fair. American Express's powerful rewards program is an example of how financial institutions can provide value to businesses, while regulators focus on creating a banking system that serves the diverse needs of the US economy.
Should Tech Companies Be Allowed to Establish Banks?: The potential benefits of tech companies entering banking must be weighed against the risks of market concentration and regulatory challenges. Separation of banking and commerce is crucial to maintain fairness and financial stability.
As technology continues to disrupt the banking industry, the question of whether large tech companies like Apple, Amazon, or Berkshire Hathaway should be allowed to establish banks is a complex issue. While the idea of combining the best of banking and commerce might seem appealing, history has shown that such mergers often result in negative consequences, including an unfair concentration of market power and increased opportunities for problems. The separation of banking and commerce is a safeguard against these risks. However, with the blurring lines between payments, lending, credit, deposits, and savings, this issue is becoming increasingly relevant. While there's a potential for innovation and improved customer experience, careful consideration and regulation are necessary to ensure financial stability and fairness.
Understanding the Intersection of Technology and Regulation in Finance: Stay informed about technological advancements and their implications for financial markets and regulations. The intersection of technology and finance requires ongoing attention and adaptation from regulators.
Key takeaway from the latest episode of the Odd Lots podcast, featuring a conversation with Michael Hsu from the OCC, is the importance of understanding the intersection between technology and regulation in the financial industry. Michael Hsu expressed his appreciation for the Odd Lots podcast and shared his thoughts on the impact of automation and artificial intelligence on the banking sector. The hosts, Tracy Alloway and Joe Weisenthal, discussed the potential inspiration they may have provided for Hsu's perspective on the topic. The episode also highlighted the growing influence of technology in finance and the need for regulators to adapt to these changes. The conversation underscores the significance of staying informed about technological advancements and their implications for financial markets and regulations. Additionally, the podcast introduced a new podcast from Bloomberg called Money Stuff, featuring Matt Levine and Katie Greifeld, which delves into Wall Street finance and other related topics. Listeners can tune in every Friday on Apple Podcasts, Spotify, or wherever they get their podcasts. Overall, this episode of Odd Lots showcases the importance of staying informed about the latest developments in finance and technology, as well as the potential impact on regulation.
