WebSummit Rio Panel: Are We Heading for a Global Banking Crisis?
During the panel on banking at WebSummit Rio 2023, several important questions were raised about the sector. One of the most pressing issues was whether we are heading for a global banking crisis. The panelists, which included: Don Muir, Founder & CEO of Arc; Taynaah Reis, CEO of Inkluziva, Juca Andrade, Chief Product Officer of B3; and Mateus Marques, Reporter of Globo News, shared their perspectives on the topic.
When asked about the differences between the 2008 financial crisis and the current situation, the panelists highlighted the role of Fintechs in providing support for startups during the recent crisis, and the role of the government in the former crisis. Looking towards the future, the panelists predicted an accelerated adoption of Fintech solutions in the banking sector.
Check out the full recording of the panel below!
Transcript:
Hello everyone. Good afternoon. It's a pleasure to stay here with you in the last Web Summit day, so we still have some questions to answer and now. Our topic is: “are heading for a global banking crisis?”
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So this is the first question, is what do we know about the current banking crisis. So let's start with you, Don.
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Sure. Thanks for having me. Today in the United States, the regional banking system is in free fall. Yesterday the Fed announced the 25 basis point raid hike, and this morning PAC West, the number 53 largest bank in the United States.
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Share price dropped by 50% last I checked down 90% year to date. How'd we get here? SVB was the first domino to fall. SVB served a segment of the market that burns more cash than it takes in. It serves the technology ecosystem in Silicon Valley with record level rate hikes. What we experienced with an asset liability mismatch that caused a ripple effect throughout the regional banking system.
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With FDIC coverage in the United States at $250,000, there were too much uninsured deposits. On these banks balance sheets, and as deposits left, the banking system crisis ensued. And so how do we prevent this? There's both private market and public sector responses to prevent a global banking crisis.
For one, the FBI needs to increase its coverage from 250K to a million dollars.
That'll ensure 90% of commercial bank accounts in the United States across the 22.5. Million commercial accounts in the us.
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Second, and why I don't think we're heading towards a global bank crisis is the private market response. We'll get into 2008 later in this conversation, but we're seeing M&A by the two big to fail banks acquiring the smaller regional banks that are struggling. And second, it's the role of technology. Technology. FinTech specifically is helping prevent this global systemic failure by stepping in to help these companies. In a time of need in diversified cash across dozens or hundreds of banks across the regional banking system.
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Thank you. Tell us your perspective on it Juca.
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Good afternoon. Just to tell a little bit why I'm here, because I work for the stock exchange in Brazil. What does the stock exchange has to do with the banking crisis?
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We are also regulated by the Central Bank of Brazil. But in reality to myself, I used to work for banks before joining the exchange. So I worked for big banks, US banks, like Citibank, bank of America in the past, and I joined the Exchange six years ago. So to the answer to that question, so I have some experience on the market side, on the treasury or management of liquidity of the banks.
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So I have some experience in the past. I was present at the 2008 crisis. I was at Merrill Lynch at that moment, which turned to be to become Bank of America right after. So to answer your question are we heading to a global banking crisis? My answer is no. It's hard to say no. So emphatically as I'm saying but probably not.
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And why is that?
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Because I think, as Don mentioned already, We are it's not a global banking crisis. It's a crisis for sure, but in the mid-size banks in us. So that's something different. And we can talk a little bit later about the 2008 crisis. But here the issue is not the asset quality of the banks, but it's more on the liability side.
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So exactly as you mentioned, Don, the issue here is the like a bank run. On the mid-size banks and also so the liability of those banks and of those liabilities, deposits not being insured by the F D I C. That's something that is, creates some kind of bank run. So people start to think that they might lose the money and start to withdraw the money.
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And that's a problem with any bank. Would suffer from a bank run. Not only the mid-size banks. If you have a big bank with a bank run, it'll suffer as well. You have all the liquidity provisions, everything to cope with that situation. But in the case of everybody wants, at the same time, the money the bank will not provide.
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So FDIC now is playing an important role in, and they just said for the mid-size banks that they're going be there and they're gonna guarantee all the deposits. It's so there is some issues going forward because of that, but at least so far they're doing that. They don't have an asset quality.
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It's like on the liability management side. So it's pretty different and it's located, so that's why my answer is no anti vision. I don't think the global banking system will collapse. But we will definitely be seeing who is swimming naked.
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The credit Swiss was not a surprise to the trouble that they had been on the past.
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But I do think that mid-sized banks in the US and who have the risk exposure to us tr treasury bonds, they will see like a big trouble. And we need to get better at managing the risks Me exposure. We need to get more cash in hand if due to if everybody wants to withdraw. We need liquidity immediately.
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So I do see will be a bumpy ride going forward, but not a collapse. Let become a little bit on this part. When you look in terms of liquidity, the government bonds issued by the US Treasury are probably the most liquid asset in the world. So in that sense, liquidity is not an issue. But the problem with in case particular of Silicon Valley Bake is that they bought a lot of long-term bonds and the long term bonds already also heavily liquidated.
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But the problem is that they have zero deposits, zero rate, interest rate deposits because interest rates were pretty low and they bought 2% yield bonds, 30 years bond, 10 year bonds. And then what was the issue when the Fed start to raise rates that pretty much drop the price of those bonds.
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And why is that? Because in initially it was playing 2%. And for you, in order to make it, to pay 4%, let's say the price of those bonds needs to fail. And that was the problem. So the problem is that not the liquidity of the bond, but the price of the bond, which collapsed. And then they had to realize that, or sold those bonds because people starting to withdraw the money, so they need to sell those bonds.
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And initially they didn't have the loss, but they have to, they did. They really have to materialize that loss. And that's what provoked the issue with the bank in the end. Something with yesterday's rate. Hike 25 basis points. It was the 10th rate hike in just over a year in the United States.
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That's the fastest pace of rate hikes by the Federal Reserve in my lifetime, in most entrepreneur in Silicon Valley's lifetime in Silicon Valley Bank, right in 30 out of their 40 years of history. So they bought long dated fixed income assets at 1.5%. Rates spiked and all of a sudden there's this asset liability mismatch.
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That was problem one. Problem two is the nature of the businesses they served. These are cash burning, hyper-growth tech companies that rely on venture capital funding. Venture capital funding stopped so there's no more inflows coupled with cash burning by the portfolio companies of these banks.
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That's outflows. So deposits were declining at SVB in FRB and now Pack West, and as a result, declining deposits. Asset liability mismatch resulted in systemic failure. So is the fed to blame or the VCs to blame or the startups to blame?
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Who knows? There's plenty of fingers to be pointed around. What I'll say is it's really on the Fed to step in and increase FDIC coverage to prevent future issues like this from occurring and ultimately to preserve the value of the regional banking system.
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But just to complete on that as well, it's important to mention that for the last 10 years or more, maybe since the 2008 crisis, Rates have been pretty low. And as you said, like a lot of companies appeared some from there, like we're talking about 15 years. And for the last 15 years, rates, interest rates has been really low since the crisis, right?
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So for you, for example, you never saw interest rates so high, but that's something that was present before the crisis and it's still, that's part of the issue that the newcomers are not totally familiar with, that type of thing.
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So zero interest rates probably not there. Anymore. I believe, because that was some kind of an issue that created those types of problems.
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Then I wanna ask you about the new economies and how we can make a difference, because you talk more about this, you can talk more about this. I wanna listen you a little bit about how, why they're talking. And while you think about this that is a big question into capitalism. What BRI value we are bringing, what the banks that we choose to hold our money are bringing value to the society?
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So in the crypto space, we have this concept called it regenerative finance, where we do need today to include financial incentives for impact and social environmental space too. So we need to consider those topics today. Not money for money, but for money, for what value we are creating to the society. That's what we need for the future.
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Why do you think about this Don?
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There were really two levers you could pull to prevent global systemic failure. There was m and a by larger banks and there was intervention by the federal government. Those same two levers exist today. So what's different?
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The different is the role of technology. And as I said in my prior response, I think technology is the savior of the banking human system. It's the prevalence of banking, other service infrastructure and digital banks that can step in and provide a level of diversification that a traditional bank could only dream of.
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That level of diversification can help spread risk across the broader banking ecosystem and eliminate these issues going forward. You was working in a bank in 2008.
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What's the biggest difference for you about that time?
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At the moment the thing was different because first, currently the problem with the liability side, the deposits of that banks at that moment, 2008, the problem were with the quality of the assets.
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So that's a different story because then liquidity might be really a concern, and the credit risk on the bank was much higher. So first of this that was a big concentration of the assets of the banks in the real estate sector, especially on the retail, let's say real estate. So the problem is that there are too much leverage.
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A lot of people buying homes and buying the second home, the third home, and then a lot of leverage, people borrowing money to buy those houses. And the banks were saying no, we are diversified. How we were diversified. We are not lending only to real estate in New York. We are also landing to real estate in California, maybe in Texas.
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But the problem was that diversification didn't work because everything collapsed at once. So the diversification didn't happen at the end. So a lot of trouble with all the assets of the banks and also big banks. We're not talking about small banks at that moment. We have the brokerage, like starting with Birds Stearns, then lems, Leman Brothers, then Merrill Lynch, then Morgan Stanley, then Goldman Sachs.
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All of those were brokers. They were not banks, but they acting at that moment. Like banks, that was, they turned into banks, they were acquired by banks. Some guys in the case of Merrill Lech for example, some were went under, which was lemon, broader. So it's a big different story because of the size of the banks and the concentration of the quality of the assets.
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So let's talk you can talk.
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The authorities are much ready to handle challenges today than they were in 2018. But today we have seen like a big changing in worldwide order with China rising in like many commodities apart resources. So we do definitely need to see the perspectives in a global perspective, what China is bringing to the table too.
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And many contracts that are running away from dollar. So the dollar risk exposure and like many contracts being hold on euros and now people are seeing like, Is dollar really a good reserve to have and as a, what are the liabilities for that too?
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So let's talk more about the future. What do you think about the future for the next three, five years? Don can start.
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So the number one question I've received at Web Summit is, where is all the cash gone? SVB out of business FRB, shuttered. Now Pack West down 90% likely to be acquired. Where did all these deposits go?
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We cut the data at Arc and we found that nearly a hundred percent of the deposits went to JP Morgan Chase, Wells Fargo in the Bam, fintechs Brex Arc Mercury Bank in the United States. It's my view that the future of banking, the next generation bank for Silicon Valley will not be a bank at all. Brex, Arc Mercury, we're not banks and customers, depositors tech startups, they now realize that's actually a good thing.
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As I was saying, at Arc, we can achieve a level of deposit diversification that traditional banks simply can't accomplish because Arc is a technology layer that sits on top of a network of the most systemically important financial institutions in the world that are too big to fail. We can effectively diversify s to achieve 20 plus FDIC coverage at the click of a button.
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And at the same time, we can provide the type of customized support that a software founder that's growing at 300% year over year expects and deserves for you, Tina, the future. Yes, there is a lot of people that are underserved, billions of people that we need to include in the economy and the banks should be designed to be inclusive today.
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So I do see with the rise of cryptocurrencies and decentralization, like more opportunities for people to be included on the economy.
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Juka. Yeah, it's important. Don mentioned situation that we're facing right now. It's a, a run to quality, which is, I think it's not good for the system because you're increasing concentration, and I think that's something that's happening right now, but I don't believe that's gonna happen going forward.
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I think that's gonna be the opposite. I think the more that we have technology as you're saying, and that new solutions providing through technology and all the sources that technology can provide, it's important as another type of diversification for customers. So if you look at Brazil, for example, and I can talk about Brazil right now, we have the big banks, which are, the system in Brazil is very solid.
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But it's important to mention that there is a new bank in Brazil that they were here in the first panel that with Newbank, Newbank is a total digital bank and also have 80, 88, 0 million customers, and they have the, not even a single branch. It's everything electronical. So and that brings technology, that brings the banking service to the people.
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So I think that's something that's really important to notice. I think the banks also, the incumbents are moving into that direction. But I think that will bring a lot of democratization and services to people, and I agree with that.
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You make a really good point. These regional banks, these sector specific banks, they serve a really valuable role in individual communities In Silicon Valley, specifically, the crisis we're experiencing the United States today, it's very specific to the tech economy and svb frb, they were darlings in the space.
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Many of the most. The largest, most durable brands that we all use in our daily lives. They were built on the backs of svb. They understand their customer base, they provide them with very customized loan working capital solutions, level of customer service that a big four behemoth bank simply can't serve.
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Those large banks are too busy serving their multi-billion dollar publicly traded corporate clients that are profitable with positive free cash flow to actually serve. This earlier segment, very unique, hyper-growth segment of the economy. And so the value of the regional banking system can't be understated.
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And if the Fed wants to preserve that system, they should think very critically about increasing FDIC coverage in partnering with fintechs to keep those those bank systems alive. And we definitely need education to be a big play role into that too. So at Inclus that's what we do. We take vulnerabilities into the education side and bring that like forward.
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That's what I do think like with financial literacy, more people can be included on the economy too.
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Thank you for today for sharing your idea with us our ideas. Thanks so much everyone.