Odd Lots - The OCC’s Michael Hsu on the Big Risks Facing Banking Businesses Right Now

Episode Date: November 9, 2023

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.See omnystudio.com/listener for privacy information.

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Listen on Bloomberg Radio, stream the show live on the Bloomberg business app, or listen to the podcast. That's Bloomberg this weekend. Saturdays and Sundays starting at 7 a.m. Eastern. Make us part of your weekend routine on Bloomberg Television, radio, and wherever you get your podcasts. Hello and welcome to another episode of the All Thoughts podcast. I'm Tracy Alloway. And I'm Joe Wisenthoff.

So, Joe, we've had a busy few months. Yeah, we really did. We were all over. We crisscrossed the country. We did all three coast, 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. 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. That was so fun. I loved going to Vegas. I really loved you. I love Vegas. It was so cool that I got the opportunity to join you in Las Vegas. Okay, listeners. This is where we're going to get into a little bit of an argument.

You're going to hear Oblox co-host air some dirty laundry. 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. 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. 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 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. It sounds like a lot of excuse, Joe. 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. At the time, I didn't complain. I complained when I came back. No making me feel bad about myself obliged. Let me just say, the world's smallest microscope would not be able to locate my sympathy for this argument. You know what? No, okay. Let's leave it there. I just, I never.

Okay. Listeners, let me say, though, that you are in for a treat, as is Joe, because he wasn't there. is the first time he's going to hear this interview, but we spoke, or I spoke, with Michael Sue, the acting comptroller of the currency. And we had a really interesting conversation. This was a live episode recorded on stage at Money 2020, which you might know as the big sort of fintech gathering. And 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.

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. 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 sort 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 Sue recorded in Las Vegas,

Sands Joe at Money 2020. Michael Sue, acting controller of the OCC. Thank you so much for coming on all thoughts. Tracy, thanks so much for having me. Love the show, and it's a real honor to be here. 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. What does the OCC do? And like how does it compare? I feel like there are so many different banking regulators. How much time do we have?

Yeah. 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? 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.

Wow. Okay. Now, we've got over 4,000 banks in the banking system. but by assets, the largest banks tend to be nationally chartered. You know, your JPMorgan Chase's and your cities of the world. So by assets, the OCC supervises and regulates about two-thirds of the banking assets. Oh, got it. In the system, right?

So you'll get a little bit of that 80-20 rule for nationally chartered 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. No, our listeners love detail. 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 it was really interesting about the OCC is historically, so we were founded

in 1863 during the Civil War. Wow. And before the OCC, you had free banking. And this is relevant for stable coins. Right. Because that system. But they all issued their own currency. Yes. I remember this. Right. So every, 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 are 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, right? Specy. And sometimes you had it and sometimes you didn't. Right. And so there would be discount rates on these dollars. That's right. And so it was a mess. And you know, imagine like there's panics all the time. There's a lot of fraud and there were money men.

People would walk or go around with bags full of money from town to town to exchange these dollars because if you're a farmer, you want to be able to do your business. So during the Civil War, Sam and Chase is like, hey, we've got to fund the war and we got to bring the union together. So they've got, they pass 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. That's crazy. So the OCC was around even before the Fed. Yes, yes, way before. So you have one up on them. So, well, and all we do is supervision. We are a very supervisory focused agency. And so we've got a long deep history. And, you know,

the stable coin debates, you know, this is less relevant now, but a lot of times folks are saying, well, why don't we want more, don't we want stable coins? And it's like the stable coin 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. Well, since we're on the topic of stable coins, 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 stable coins, you know, we did have a big collapse last year with Tara Luna.

You at the OCC have always taken a sort of cautious approach to stable coins. 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 stable coins were supposed to be the safest aspect of the crypto system and then 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. But what was it that made you take that cautious approach? So if we back up a little bit, and just the rise of crypto, so I became acting comptroller

in May of 2021. And that year alone, crypto was just on a rocket. That was a big year of growth for crypto in general and stable coins. 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. Right. You pool all this stuff and then you trade it as one for one.

And so there's, you know, Jillian Tech got this great book, Fools Gold. And I recommend it to everybody because chapter one, innovation, chapter two, perversion, chapter three, crisis. And so this cycle happens over. The first innovations for credit default swaps were really, really good. Right. 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 with, you know, who understand nuclear physics can actually explain the stuff. And that leads to, 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.

And so, of course, I think we do what we do best in government. We dig in. What are the facts? Let's like crack the thing open. and try to understand this best we can. And the more we looked, the more worrying signs of like, hmm, this is not all it's cracked up to be. And especially with stable coins, there was a big gap between the talk and the reality.

And 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. You make sure you have those controls in place. And so for the banks that were, you know, like I call them Crypto Curious, And there were a lot at the time. They lost interest because I think they recognized, oh, that takes an awful lot of work.

And then once the crypto winter happened, a lot of that, there was a big pullback from that. Right. Well, the one other thing I wanted to ask is, stable coins aside, you know, 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 U.S. 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. So I'm going to knock on, I'm not sure if this

is wood. I'm going to knock on it. Our producer, Carmen, is going to kill you for making ambient noise during the podcast. 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 taking place in the crypto space. Again, if you go back, I think the stats are about a billion dollars

of fraud, $2 billion of scams, and $3 billion of hacks last year. Like that's, 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're decided it's just not really worth it. So crypto is by no means a monolith. And even though you've taken a cautious approach to stable coins, 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. What's the draw there? So the OCC is hosting a tokenization symposium on February 8th, mark your calendars, open to the public. Our keynote is going to be

Hiong from the BIS. I know you and Joe like... And Al Lod's guest, one of our favorites. Yeah. Yeah. And Hion 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 I'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, and tokenization of real-world assets and liabilities. Most crypto is not backed by anything, you know, Bitcoin, Ether, etc. Or if you have stable coins. Tokenization is a different game.

Cryptos, it's retail focused, and most of the interest in those coins is based on a hope for speculative gain. 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, like 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 into different ways.

It's complicated. And it creates frictions 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. Wait, can you explain that a little bit further? Because when I think tokenization, I think like 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. Yes. Like, what is the innovation here? Right. So this is very important point.

Blockchain. No, I didn't say blockchain. No, you didn't. Okay. And I think that's a very important distinction, right? I think there has been a little bit of a, what's the best way to put it? It's almost like a raw shot test. You know, you say blockchain, and some folks that oh, that's the next big thing, whether they understand it or not. Like, oh, it's super efficient and fast.

Right. It's not super efficient or fast. I mean, I remember the years when we were going to put everything on the blockchain, like groceries or like balsamic vinegar was going to be traceable on the blockchain to make sure it came from a specific region and things like that. Right. And so the design of public blockchains was 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, 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 everyone's fully aware that that has happened. With tokenization, you actually collapse a lot of those steps into a single thing. Oh, I see. So multiple processes can exist as sort of like one thing that can then move through the system

and be verified. Exactly. And, you know, for, again, for the, for the, for the banking nerds and the payment nerds out there, this is exciting. Now, it's hard to, 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, um, identifying, addressing, assessing, you know, managing those risks and frictions. And so, you know, that in the, in the, in the, for the regulators in the central banks that have been kind of interested in this space, a lot of the more of the excitement going forward is really in this kind of tokenization space rather than in kind of the retail space, which I think has been colored by a lot of the

recent, you know, the crypto events. This is Caroline Hyde. And I'm Ed Ludlow inviting you to join us for Bloomberg Tech, a daily podcast focusing exclusively on technology, innovation, and the future of business. Every weekday we bring you the top headlines from the world's biggest tech companies. From finance to defence, AI to entertainment and from startups to the magnificent seven. We highlight the latest stories of the people and companies pushing the tech sector to new frontiers and the politics that shape global tech markets. We do this all every weekday.

Then bring you the most important conversations and analysis in our podcast. Search for Bloomberg Tech on YouTube, Apple, Spotify, or anywhere else you listen. Join us every afternoon on your. commute home and stay ahead of the tech news cycle. That's the Bloomberg Tech podcast. I'm Caroline Hyde in New York. And I'm Ed Ludlow in San Francisco. Subscribe today wherever you get your podcasts. Well, since we're on the topic of financial innovation and we are essentially at a fintech

conference, we're at Money 2020. I wanted to ask you about a recent publication from the OCC. It's the interagency. It has a very catchy name. The interagency guidance on third party. relationships. Is that just basically a way of saying that you're worried about fintech partnerships with the banks? 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. Okay. So payments as well and things like that. Payments, but a bunch of others as well. And so the story I like to tell is, you know, way back in the beginning, all of banking was done by banks. And so,

you can imagine like there's like a box and you can label it 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 you know probably the clearest example is like with the core processors a lot of banks rely on the core processors to do certain processing accounting you know reconciliations etc and so that's 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, and then the bank would 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 like an extension of the bank, if you will. Okay, 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, because our comparative advantage is different than 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 say, we will be the interface

with you to take a deposit, make a loan, et cetera, 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. Yeah. It's almost like, you know,

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. But when there was all that time. Yeah. 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, right?

The whole idea was 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 like taking pieces away or like there are new players, new companies that are tapping the banks for specific pieces. It's all very confusing. 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, right?

Money funds took deposit taking and securitization took lending. 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. So if you drew a picture, and one of my favorite pictures of this, Zoltan Pozar, who is another odd last guy. Thoughts favorite. He drew this map. His famous map that he had pinned on the wall of the New York Fed.

More than, I mean, a bunch of folks had this map pin. It was a gigantic map. And, you know, 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 follow the money. Right. You just follow the money. Right.

How it's moving through the banking system and the shadow banking system in that time. And so Zoltan, and then Adam Ashcraft was a co-exhaft. 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 1? They would do originations for mortgages. Warehouse lending. Someone else would do warehouse lending. Distribution. Someone else would do. And you'd look at that and say, well, does that make sense? Well, there's like a specialty there. Okay. And maybe they're particularly good at that. And there's economies of scale.

They would argue efficiencies, right? Efficiencies. And so you'd say that 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, uh-oh, does this hold? And I think the real insight from the Pozar, Ashcraft, work was 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. It's like you've got the conservation of matter. Like 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 like 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 a very similar logic to the capital markets system remediation. And again, each point makes sense. When you do it one by one, when you zoom out, what does it look like? And what's the risk reward? And who's bearing what risk? Well, okay, so just on this point, I mean, maybe I'm reading too much into the 2008 analogy,

but like one of the reasons it all went off the rails is because as you have, 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. So 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. Like, is there enough to go around to support such a complex ecosystem? Right. 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 is 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 to acquire that customer. So they partner together. And they said, let's go get that customer together. And the bank says, that customer is my customer as much that it is as yours. And 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.

And then they, you know, what's the rev? We have split between those two, and they can negotiate that. At the other end of the spectrum, you've got banks who then, who do they deal with? They're like, this is too complicated. We just want to provide the banking as a service. But we want to do it at scale. And lo of a behold, there are some companies out there.

That's just what they do. So, you know, 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, we have partnerships with lots of banks. It's funny. It's like there's wear all the way down. It's so funny. And so they go to them.

And again, I don't want to paint all of them with a broad. There is a spectrum on this. And some of it is done in a way that I think can be safe, sound, and fair. In others, we've seen that's not the case. And so in those instances, the bank has no idea who the real customer is. And the fintech is like, look, we don't do compliance. We don't do KIC. Someone else should handle that.

And so we're right back to this picture of each slice is doing something slightly different. and, you know, 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, and we don't want that. And so, you know, it's really important for us as this ecosystem evolves, and we've got an eye on that, and we guide it towards, you know, things that are healthy, because there is good innovation out there that can be paired, that can be incorporated to the banking system. but we want to make sure that we don't end up with this kind of patchworky,

you know, disintermediated, disaggregated mess. Hello, I'm Michelle Hussein, and for more than 20 years, I was at the BBC. But all the time I was delivering the headlines, I wanted to go further than the news of the day, to spend more time with the people shaping our world. And that's what I'm doing here on this podcast, speaking to people from Nigel Farage. to love you trying ever so hot. Russia needs to be taught a lot. To tech journalist Karaswisher.

And the tech industry is running wild. You know, they've gotten what they wanted and they've seen a huge run-up in their stock prices. This will be a place where every weekend you can count on one essential conversation to help make sense of the world. So please join me, listen and subscribe to the Michelle Hussein show from Bloomberg Weekend, wherever you get your podcast.

ask interesting questions. Since you are the oldest banking regulator in the U.S., I want 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. Yes. Do you want a sort of Canadian-style system where you have like six mega banks and everyone banks with them and they're highly, highly regulated? Or do you want the sort of vibrant, it's a wonderful lifestyle banking system where there's local banks everywhere and everyone knows you and, you know, your banker will personally extend you alone and things like that. Where does the OCC fall on that debate?

Do you have a vision of what you want? 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 who are contemplating this usually is to say there's too many banks, like, you know, 4,000 is too many, what's the right number, or to compare to other countries. And what it's missing is banks exist to serve people and communities and the economy. So what's missing from the question is, well, who are the people, communities, and the economy that we're trying to support? The U.S. is very, very different in Canada. 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, you know, regulators, we bank right, love to think in terms of ratios. So the question of like, what should the banking system 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. Like the large megabanks can't serve, don't want to serve, all those different, you know, I got in this debate yesterday with one of the about this long tail of cases in the U.S. 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 like, what is the best way to meet and empower all of them? 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? Oh, yes. 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? 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. You know, 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 U.S. economy keeps growing. The banking system has to grow with the U.S. economy.

So if you were to just graph U.S. GDP and the size of the banking system, they pretty much match on top of each other. So as long as the U.S. 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. So since we're talking sort of existential questions for the U.S. 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 U.S. between commerce and banking. And it's sort of like never the twain shall meet. Every once in a while there's a rumor that like Walmart wants to start a bank or something and then it gets shot down because it's not allowed in the U.S. But I kind of wonder, you know, 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 Apple? 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. So this is probably you 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. In generally the history of... Wasn't Wells Fargo a stagecoach operation? That seemed to work out okay. Where we have, I mean, if you go back to 2008, right? Like, you'd say like the I'm being facetious, but you're right. But there, we have lots and lots of examples where we said,

hey, wouldn't it be great if we took these things and like you take the best of each and it's like, you know, 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 have to be careful of. One is there does become an unusually high concentration of power, market power, because they reinforce the banking and the commerce reinforce each other in a way that's quite unfair. And that can have, you know, a lot of negative impacts. So that's one thing to be attentive to. And the other is the opportunities for problems go up because now how commerce goes impacts banking. And again, that's not a safety and sound,

that's outside of the zone of how safety and sound is supervision of typical thing 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, et cetera, that's banking. And this is a very fluid, you know, rarely does a 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 did a little bit of, you know, paid a little bit of yield on this cash that's sitting with us? Wouldn't be great if we did some lending. It's a slippery slope to being a bank. Yes. It's happened to everyone. Yes. And so we want to be really, really attentive to that.

And look, if there's a way to do it, that's going to be safe, sound, and fair without financial stability concerns, I'm open. Like, let's talk about that. But history has proven that that's tough to do. All right, Michael Sue, thank you so much for coming on online. That's really appreciate it. Thanks so much for having you.

All right. Well, that was the live conversation recorded at Money 2020 with the OCC's Michael Sue. Joe, do you regret not going? Tracy, you're so capable as a host. 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. You flatter me to make yourself feel less guilty. That's correct. I thought it was a super interesting conversation. Michael's a big All-Bots fan, which was kind of fun. And maybe we inspired him with the supply chain analogy. I hope so. Me too. I love it.

All right. Shall we leave it there? Let's leave it there. This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me at Tracy Allaway. And I'm Jill Wisenthal. You can follow me at the stalwart.

Follow our producers, Carmen Rodriguez at Carmen Armin, Dashel Bennett at Dashbot and Kel Brooks at Kel Brooks. and thank you to our producer, Moses Ondom. For more Oddlots content, go to Bloomberg.com slash Oddlots, where we have a blog, a transcript, and a weekly newsletter that comes out every Friday. And check out the OddLodds, Discord. Discord.G. slash OddLots, chat with fellow listeners 24-7. And if you enjoy OddLots, if you want us both to go back to Las Vegas at some point,

then please leave us a positive review on your favorite podcast platform. Thanks for listening. On April 4th, 2023, around 2 in the morning, a man was found stabbed multiple times on a sidewalk in downtown San Francisco. Hey, who did this to you? What happened next turned the story into a political firestorm. Reports have identified the victim as Bob Lee, the founder of Cash App. From Bloomberg Podcasts, this is Foundering, the Killing of Bob Lee, beginning April 16.