Odd Lots - What It Takes to Build One of the World's Biggest Banks

Episode Date: January 26, 2026

One of the mega-themes of the economy is that the big keep getting bigger. You see it in technology, where the megacap software companies are outperforming their smaller peers. And you see it in finance, where the world's biggest banks keep growing their share within the industry. Across multiple fields, there are clear advantages to size and scale that keep accruing. But what does it take to get to the very top, and what are the real advantages to size and scale? PNC Financial is one of the biggest banks in the country, though not quite as big as names like JPMorgan or Bank of America. So what does it take to grow in such a mature industry? And what kind of advantages accrue to the large players? On this episode, we talk to CEO Bill Demchak in a wide ranging conversation about the state of the industry. He explains why they're still building physical bank branches, why it's not a good time to make acquisitions, and how one bank stands out from another. We also talk about the changing regulatory environment, and what the firm is seeing right now in terms of useful applications of generative AI.Subscribe to the Odd Lots NewsletterJoin the conversation: discord.gg/oddlotsSee omnystudio.com/listener for privacy information.

Thanks for listening to Odd Lots. Follow the show on Amazon Music for more future episodes or just ask, Alexa, play the Odd Lots podcast on Amazon Music. Bloomberg Audio Studios. Podcasts Radio News. Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Wisenthal. And I'm Tracy Allaway. So Tracy, one of the motifs, I guess, of some of our recent conversation. Motif is a good word. Yeah, it's a good word, isn't it? Thank you. One of the motifs of the motifs of some of our recent conversations. And also, I guess, one of the mega trends of our time is this

idea of just like scale is a competitive advantage. Size returns to size, returns to scale, the ability of someone to like pick up a phone and say, I need a lot of money right now. And the advantage that accrues to financial players, it's, we see it across a lot of sectors, but it really, it stands out a lot in our finance conversations. It feels good to be big in business, right? Like once you get big, you have all this competitive advantage that allows you to get bigger. The place where this is most noticeable, I would argue, and it's been this way for a while, is the banking industry, right? Yeah. The long run trend among U.S. banks is the big get bigger. And we've all seen those charts

of like all the little banks that compose Bank of America or a J.P. Morgan. I love those charts, by the way. I do too. And that's the direction the industry seems to be heading, right? Right. It's so interesting to me to think about like these analogs with tech because it's the same in tech, right? If you look at big tech and we talk about the mag seven, et cetera, they really outperformed middle tech or small tech. It is truly incredible. And we have intuitive reasons for understanding of that network effects, lock and so forth. And it's so fascinating that some of our story that we tell in tech must be a little bit insufficient because we see the same story replicated as we're talking about with banks. And with banks, it seems to be a couple. fold. One is balance sheet capacity, right, and the ability to do big deals of so forth. And then, of course, there's the other thing, which is just like the sort of the menu of services that you can offer a client if you're a big bank. Right. And also just the fact that you have, well, balance sheet, you have a lot of money. So if a juicy deal comes up, you can deploy it quite quickly. And you get like first dibs on issuance, which has been good in the recent credit market. So we haven't done like a ton of pure banking episode. Although we've done some, but, you know, we did the most probably right in the wake of a Silicon Valley bank, obviously.

And we talked about like the challenges of some of the community banks or the sort of smaller regional banks, et cetera. And then we know like the huge scale of like the J.P. Morgan's of the world. But also like what about the banks like just sort of like subjap Morgan scale? Not as not super regional. I believe they're called. Super regional is interesting perspectives of their own. And so and I've always said, I love talking about. bankers, people who understand how banking works, just like, I think they're usually some of our

most interesting guests. Have you looked at the KBW Bank Index, by the way? Not today. Actually, not in a few days or maybe not in a few weeks. Yeah, how's it been doing? It's up quite a lot. In fact, I think over the past 12 months, it's outperformed the S&P 500. Wow.

That kind of tells you how people feel about banks and bank regulation at the moment. Absolutely, right. One of the things when Trump won, who is the sort of like the deregulation trade, and that was one element. And arguably, I would say in finance, by and large, although 10% credit card caps does not scream deregulation. I would say that's one of the areas in which the expectations of Wall Street have actually been met by and large by this administration. Anyway, I'm very excited to say. We really do have the perfect guest to talk about the banking world in 2026. We're going to be speaking with Bill Demchak, CEO of P&C Financial, which is the sixth biggest bank in the country, I guess, a super regional.

So Bill, thank you so much for coming on Outlots. It's great to be here, but I'm going to correct you. We're a national bank. National bank. Yeah. Why did I say Super Regional? Were you once there? Yeah, because we have the megabanks and people don't know what to call somebody like us.

Yeah. I always thought Super Regional was just like that category below the mega banks. But I mean, a regional bank is a bank that operates in a region. Okay. We're across the country. We're in the largest MSAs. We're in every state. So we're just, you know, one sixth the size of a J.P. Morgan.

Got it. But we're still a national bank. Excellent. Well, since we're just in the correcting the record phase of the conversation, I'm certainly familiar with the PNC brand. You see it on things. I was probably like a stadium somewhere. Is there a stadium somewhere? We have PNC Park for the Pirates.

PNC Park. So there you go. But what do you just give us the big overview? Like, what is PNC Financial? We are a traditional. We used to call it Main Street Bank. Maybe that fits. Maybe it doesn't. But, you know, we help people save. We lend money. We do investments. We move money through payments. We're a bank that aspires to be, you know, coast to coast with a retail presence as retail share consolidates in the U.S. You know, our sweet spot is larger middle market, smaller, large corporate. But of course, we do commercial and business banking. We're active in the capital market. across basically every product but new equity issuance, but more of a traditional bank. So when you talk about scale, you were talking about scale in your intro, think of J.P. Morgan.

They've got to be in 50 countries. You know, they're in multiple lines of business beyond traditional banking. We have scale and what we want to do. So there's scale in the things you choose to attack versus scale just measuring balance sheet size. Got it. You have been growing, though. You made an acquisition recently, First Bank. Is the ambition to be, you know, as big as some of the G-Sibs, like the national giants, let's say?

The ambition isn't about size. The ambition is about being relevant. So one of the things going on backdrop to the U.S. market in particular is there has been consolidation in retail share and banking, you know, ever since they got rid of interstate banking laws. that continues apace with the megabanks largely winning at the expense of the very small banks. And so at some point in the not too distant future, I suspect that there's going to be five or six players who control retail in the U.S. The Canada model. Yeah. And our aspiration, and we're on pace to do it and we think we can do it is to be one of those five or six banks, what size that leads to?

I don't care. You just need to be relevant to. consumers everywhere in their country. And you shouldn't be disadvantaged because you don't have presence in a particular market. Well, maybe we should just answer the really simple question. How would you articulate why the really big banks continue to win share of the retail market? I could come up with some answer, but what's the real, how would you describe it? It's ubiquitous market presence. You know, once you get over 7% branch density in a particular market, you tend to outperform. Under the assumption, you have an okay reputation and decent products,

you know, that you don't have to have the best, but you have to have the menu of all the digital applications, digital signature branches in the right place, you know, electronic transfer, all the things you come to expect from the bank you guys probably bank at. You get there and you grow. And if you think about that definition, there's only three or four banks today, actually only two that fit that definition. JP Morgan and B of A. Now Wells, you know, has the potential, you know, now that they've gotten rid of the acid cap and so forth,

to continue to grow. And then you have some aspirants who'd like to get in there. We're clearly one of those and one of the, one of the people who's been after this game probably longer than most. Just sorry, what was the metric that you cited, 7% branch density? What is that? Yeah. So, by the way, we use 7% other banks.

I'll talk about eight, but it's somewhere around there. You get to a place where if you have presence in a market, seven or eight percent of the share of just physical presence with decent products, you control a disproportionate share of the actual deposits and economics coming out of that market. So I'm actually surprised to hear that because the story, you know, that's dominated since the financial crisis has basically been that physical branches don't matter that much. Yeah. So you've seen across the U.S., you know, net closures of branches is off the charts relative to new builds. But what you see behind the scenes is somebody like PNC where we are, if you think about our very dense markets where we've been for 165 years, we're thinning those branches because you don't need as much. But we're building aggressively in Houston and Dallas and Miami. We were building in Denver until we bought First Bank. So going to all these growing markets where the population's moving.

Man, it just occurred to me, I already, after we do this episode, I want to follow up and do an interview with, like, whoever your main person doing site selection is, because we've done episodes on like retail drive-through site selection, grocery store site selection. We have a great team. We're building, by the way, you know, we've announced we're building 300 branches in these new markets. And as an aside, once we knock a hundred off, we'll add another hundred. So it's going to keep going. We're probably a thousand short of where we ultimately want to be, but we don't have to be there tomorrow. But just building 100 branches a year is a massive exercise on site selection. You're a construction company.

Yes. I mean, exactly right. So you need to pick the right location. You need to choose whether you're going to do a drive-through or are you going to be at the end of some shopping, something where you're kind of an end add-on to a new development. The physical, you know, we have preset design so we know what we're building, but you still need a contractor. You need somebody running at the physical plant that you move into the branch. We have pods now. New branch opens, truck with a pod shows up, and everything that that branch needs to run from computers to paper to pens is in a pod.

Just deliver it right into the branch, which is what we're going to do when we do the first bank conversion is in his side. That's really interesting. The news doesn't stop on the weekends. context changes constantly. And now Bloomberg is the place to stay on top of it all. Hi, I'm David Gurra. Join us every Saturday and Sunday for the new Bloomberg this weekend. I'm Christina Rafini.

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It's important to understand where you spike, but also really acknowledge where you don't and find people who can fill those gaps. Listen to Leading by Example, executives making an impact on the IHeart Radio app, Apple podcast, or wherever you get your podcasts. Let's talk about bank regulation because I think this is, yeah, very fun. Yeah, very fun. This is part of the consolidation story, I think, is that even though post-financial crisis, there was more focus on the significant banks, the G-sibs, at the same time, those G-Sibs

seemed to have benefited from some of the regulation. Is that how you would characterize it? I don't know that they benefited from regulation. They had to carry extra capital. they clearly, you know, in times of crisis, have done better than the broad swath of smaller banks, as we saw with Silicon Valley and some others. But they were sort of walled off from competitors. So, you know, I've talked for years about just the need to be able to compete. Some of that competition comes from M&A.

Some of it just needs to, you know, the ability to do certain activities. And in theory now, we're in an environment where it's easier to do that. And I think practically that's probably true. I would tell you, I think we could have done large deals had we chosen to back during the Biden administration. I think people tend, like one of the sound bites that comes out of regulators is good deals are okay, bad deals aren't. But they won't tell you what a bad deal is. But a good deal is typically when you have one good bank, somebody's in charge, you have technology that can actually absorb the other bank and you can protect consumers and so and so forth. those could have gotten done in the last administration.

That's interesting. Well, let's talk about more about your philosophy of M&A because, so, Pete, your stock has done very well. But it has for a while, especially in the last year, up until recently, had been underperforming some of the other banks. And your, like, quote is like, everyone thinks we're going to do some, like, I don't, the non-exact quote, but it's like something, why does everyone keep saying? The whole world's betting I'm stupid.

Yeah, right. But so, like, but then how. How do you grow? So, okay, all the market, they don't want to pay up for your stock because they think that you're going to do some stupid deal. This isn't complex. We'll just start with the basics. Yeah, all right. Last year, we outperformed, I think everybody, including JPMorgan and Topline Revenue Growth and EPS, PPNR growth. What's PPNR? Sorry. You think I don't know. Pre-provision net revenue. Okay. Yeah. Fantastic year. We set records. and new client acquisition, revenue growth, expense control,

great new tech roll out on and stuff, and we underperform. Part of the backdrop of that was the megabanks outperformed as people correctly thought regulation was going to drop and they could return more capital than they historically had. So take that bucket, they're doing great because they have all this capital and they're free to do whatever they want to. Smaller banks went up in value because, you know, people like Bill Demchek with a big mouth said there's going to be consolidated.

so everybody's going to buy them. So they go up in value. And because we are a likely acquirer, given our historical performance and being good at integration, we get crushed. Did you get penalized from the perception of a more liberal MNA attitude? Absolutely. But part of it's my fault. And, you know, because I talk, you know, I talk about the need for scale.

I talk about the consolidation that's happening in retail. I talk about why this makes sense. And people make this leap. and therefore end the sentence with at any cost. And that's a terrible assumption. Not at any cost. We can do this organically. It just takes longer.

And, you know, today with everything flying and value and us underperforming, it's extremely unlikely we find something that makes economic sense for us. Plus the fact, just as aside, the environment is so good right now. Nobody, none of the reasonable size banks want to sell. This is like a, this is like a. This is like a sunny day in August, man. You've got, you know, rates are going the right way. The curve is steeping out.

Credits, great. Regulations coming down. Nobody sells their bank in that far. Do you wake up every morning and check the PNC share price? I always wonder about this. CEOs of public companies. You're graded instantaneously by the market. Yes, but the market at times is an unfair grader,

so I don't pay attention to it. You know, when we, I look at metrics all the time, are we winning clients? Are we automating things and getting more efficient? Are we? Is our marketing campaign reaching people? What's our traction level and digital? You know, all these things that ultimately will lead to a share price performance, but not in the day. Well, let's talk then a little bit about, okay, so a lot of banks are doing well. They don't, they're not, they don't want to sell. you're not a stupid guy, so you don't want to make like a dumb deal. So there's not going to be deals. What? So there's not going to be deals. Okay.

So yet you have this aspiration to be one of the really big banks. And so, okay, that leaves organic growth. What is the deal? But it also, I mean, in perspective, right? Sure. We're in this. The weird window in regulatory change isn't the Trump administration. It was the Biden administration.

Any time before Biden and now after Biden, And deals get done all the time. We're 165 years in business. You know, the little chart you talked about with all the banks. Yeah. We've got to have 150 banks under us through time. And that'll continue. But it doesn't have to happen now, right?

The weird thing about now is just we ended the four years of strange period under Biden. Got it. Now we're just back to the old game. This will go for, you know, go on and on and on. So what is the essence of the organic growth strategy to different, if it's, yeah, to grow? So far, I've been talking about retail. Let me talk about the reason for retail. So ultimate reason for retail is retail deposits.

Retail deposits are low costs. They're sticky. They allow you to support your corporate community and consumers with loans. We've been able to win in what we call our CNIB business, a corporate institutional bank business, gain share every year for the last, I don't know, 15 years, and what is a very fragmented market. You know, we talk about the mega banks gathering retail share, but in corporate commercial, nobody has any real share. It's shotgun everywhere.

And we win in that space, and we do it by, you know, going to market locally. We organize, and this will all sound kind of silly, but we don't have P&Ls by product. We have P&Ls by client. We go into the market. We have a regional president. We have product expertise. and we choose the most important and impressive clients to cover in that market. Not anybody else.

We don't do business with somebody necessarily who walks through the door because that's all that we'll do business with it. We'll call on the same grade A client, you know, that you know you want to cover if you're in Miami or you're in Texas. We'll call on them for 10 years until they call us back. Patience, persistence, good product ideas, are real low banker turnover. And we win. And you just, you know, rinse and repeat, go into new markets, add people, keep growing. Just on acquisitions, I'm really curious how difficult it is to integrate another bank with your company. Because you just said, you're good at integration. What does that actually entail? That's a great question. So integration, there's a mechanical component. And then, of course, there's a cultural component.

mechanical component should otherwise be easy, but is proven difficult for some people over time. The mechanical component, let's just talk about First Bank for us, we simply take all of their data records, so, you know, record field data items for one of their checking accounts, and we import that data, but we don't import that application. All that data comes into PNC, and then over a weekend we simply open up a million new accounts on our existing products and services. Sounds pretty simple. If you can move the data, you can just effectively open new accounts. My team will scream. It's not that easy, but that's basically what you do. It looks easy to you. Yeah. Now all of a sudden, okay, now we have all these customers with new accounts.

How do they log in? How do they learn? Like our online is different than somebody else's online. So now you're getting into training modules, communications with clients, training their branches with First Bank, tremendous front-line set of people, incredible bank in history, we're keeping all their client-facing employees. Now they all of a sudden have to know the difference between PNC products and their old products. So how do we do that? That's what integration ultimately means. There's a mechanical piece of it, get the systems to work.

So you turn it on and the lights go on. There's delivering pods to the branches, so they have all the PNC equipment and the signage and all that other stuff. But then there's a lot of time with people. We send in branch buddies. So we'll take branch managers from all around the country and go have them spend, you know, a couple weeks and, you know, sitting with the branches at First Bank. That's the cultural aspect of information. And the learning. And it's, I mean, banking, you know, in some ways it's simple.

In some ways, it's wildly complex. An employee in a branch, the problems that you might walk in, right? You say, oh, I rarely go into a branch or I don't think about it. But when you go into a branch, something's really busted. Yeah. So the employees, right, they need to know how to fix it. And that's when we say we're good at integrations, it's because we focus on making sure that our new teammates know how to do their job and can help their clients. Because they have the same clients they've had forever.

They don't want to look bad in their new role. Can you actually just talk more about that? So it's like, okay, they need to know how to like sell or be familiar. with the PNC product now. Like, talk a little bit more about, like, what that difference is, what actually changes functionally? Why wouldn't be what it is about either culture or products such that it's not just replacing the logo and the pens and the new pen?

Well, everything works at the margin slightly different. I mean, check in accounts and check in account. But imagine you're in a branch or you're in the care center or you have a problem. You made your car payment. You sent it through snail. It was timestamped the right time, but it went through snail mail, got lost. You got penalized to fee. you go into the branch and you say, you know, it's really not fair.

I sent this. And you're hitting me with a fee. And the branch person, what do they do? Right? It's, there's some answer to that. What's our procedure? Well, you know, now with AI, you can just go into a large language model that is built off of all of our customer service protocols and say, what do I do?

This just happened. It'll tell you. You know, credit the customer, the fee and send a note to the, you know, whatever the answer is for that particular problem. But the person sitting there needs to know, like, which system do I query? What's my browser? What am I? Who do I talk to?

You know, if I'm going to make an exception, do I go to the branch manager? Or can we do that here? Do I get to call somebody in some strange room in a back office in Philadelphia? All of that with us, because we automate so much of it, is now sign of query and self-learning in the branch. And then, importantly, more and more with our customer self-curing. You know, they got locked out, you know, just be able to fix it. a problem yourself. One thing I've wondered for a few years, does local expertise matter anymore when it comes to

actual underwriting, either in retail or commercial? Because I think most of America used to have this very romanticized notion of the banks, the sort of, it's a wonderful life model where your branch manager knows you and knows your entire life and business and all of that. My sense is that doesn't exist so much anymore, but tell me if I'm wrong. You're wrong. Okay. It's harder to accomplish when you become a larger bank. But, you know, how is credit evolved through time?

Consumers. Consumers now, if they're an existing client of you, are scored based on their cash flows that you see. So not a FICO score. You can actually see when did somebody pay the rent or their spending patterns predictable. You can build models to see, you know, what this person is a really diligent good credit,

even though it might not show up in a FICO. local market business. You're going to lend to this small developer. You're going to lend to this store on the corner. Branches really matter, and local bankers matter for small businesses because they see where the foot traffic is. They know the reputation of the person who's running that business. To people, you know, are they a community influencer in a good way where they're, you know,

people want to support them? All that stuff still matters. And all that stuff, the more you can give somebody, voice locally in the decision. I always kind of call it putting a thumb on the scale a little bit on a yes or no that's otherwise mechanical, the better your credit underwriting is. Well, since we're talking about consumer credit, what happens to America or the industry, if there's a 10% cap on credit card rates as President Trump has proposed? So the only thing I know for sure, if that happens, is that all their credit card businesses

in the country lose money, if we're on exactly the way. way they are today. So we have, you know, credit card business, I get swight fees, I give most of those away with rewards, I earn credit when somebody is revolving a balance. I lend credit when somebody pays it at the end of the month, right? I'm fronting that money for you if you clear your account every month, but hopefully I'm getting some swipe fees to make that good. After all that, you charge interest rates, you have losses and you get a margin, maybe you make 4%. And assume I'm making up numbers here, but assume maybe the average rate is 18%. I make four at the bottom.

Now I'm going to take my 18. I'm going to drop it to 10. Uh-oh, I just made minus four. And so all that math is going to come out, which is why I don't think this goes. Like, there's almost no way this can happen. You'll just simply shut down consumer credit in the U.S. They can't force, they could say the cap is 10%, and I'll say, fine, I'm out. Like, why would I do it if I'm going to lose 4% a year on that?

something's going to change fees are going to go up, lines are going to get cut, rewards will go away, you know, and something will emerge out of the dust, but it's not going to look at all like it does today. What do you think the genesis of the proposal or the rationale behind it actually is if, you know, everyone in the industry says this basically ends credit cards? Yeah, I think because, first of all, the emotional appeal of it, I mean, it sounds absurd that you're charging somebody 18% for revolving. credit. I think that sounds high. That happens to be the rate that you need to charge to make money,

but it sounds, which is why I never revolve a balance. I paid off every month. So there's this emotional appeal. Geez, you ought to be able to lend, like, I'll lend money to you at 10%. I'll lend money to you at 10%. Thanks. Right. But I can't necessarily figure out who you are in a sea of people. Right. There's a bunch of people I'll lend money at 4%. Because they'll never depot. You know, that's the issue. And you try to get to the broader population and extend credit to the consumer that drives our economy, science isn't so exact to say you get nine and you're 22. I don't know about you. Well, actually, I want to press this further because intuitively, I would think you'd be able to do that. You just mention the fact that you have granular access to propensity to payback that

is not even captured by FICO. You have incredible amounts of data and predictive capacity on the difference between whether me or Tracy are going to revolve. So when someone says 18% seems high, are we supposed to just believe, oh, just trust me, it's high. This is what I need to charge in order to make money in this business. I mean, I could trust you, but like, how would you? But the math is the math. Okay.

At the end result, right, you say, when you run your models and you look at, you know, propensity to pay you back, you basically, you know, whether you're looking at FICO or anything, If I go is only as good as whether that person has a job next week, right? They, they, you know, you can look at predictability and, yes, this person has been paying their rent. They have a steady expenditure thing on food and on gas and on entertainment and their savings account. Balances always stay pretty steady. That ought to be a good credit. Well, it isn't a good credit if they get fired or lose their job because the economy's in a downturn.

And all of a sudden, well, I thought that was a really good credit. I should charge 5%. Turns out I just wrote the whole thing off because there's no recovery value in that credit. That's where the science fails. There's exogenous variables you can't model. And the wider you cast the net, right, the bigger the dispersion on outcomes. However, if we've settled there, that interest rate kind of sets a reasonable profit margin. The largest card issue you're in the country, you can figure out who this is, right?

best at it, best computer models, best finding credit, best extending credit to non-prime borrowers, they trade it one-time book value. If this was a genius business, like that's way too much, I dropped the rate by 1%, you know, and gross share. The problem is it's not so great, actually. I want to talk about private credit a little bit because obviously this is an area where we always hear about banks face new competition from middle market lenders and all of that. But at the same time, we also see banks teaming up with private credit now.

And it seems to have. Yeah. Okay. Talk us through that relationship. Yeah. So traditionally, standalone high yield credit. If all you did was walk around and just lend money with no particular expertise, but across, you know, leverage clients at a single big credit, that's a really lousy return.

on capital, right? You know, all the signs going back to when Moody started tracking this stuff in the 80s, you get kind of a 35% recovery, you have a 10% default rate, you go through cycles, sometimes a lot worse, sometimes a lot better. It's not a particularly good business. It becomes a better business and sometimes a fantastic business if you couple that with the wallet that goes with that company beyond just the credit. So IPOs, M&A fees, bond field, you know, whatever the stock.

is that goes along with all of a sudden it becomes a pretty good business. What's happened in the last couple of years, we've seen this drift into more and more credit leaving banks going into private equity and other alternative forms. At PNC it manifested itself where we'd have a client that we might have banked for a hundred years owned by third generation family that just got sold to private equity. And our client's gone. Because I don't want to make that loan at that leverage ratio. and whoever does make the loan is going to demand the Treasury management relationship

and all the other stuff that goes with that client. So where we come out at it is I don't know that I necessarily want to make the loan. I will sometimes, but I want to keep the relationship. So our partnership with TCW as an example is when that happens now, we put capital in the TCW fund, as did a bunch of other people, but it happens now we'll keep the client. you know, will diversify the credit risk, but keep the fees. So the return on equity on that thing, you know, goes way up.

The whole notion, remember, like, private credit in the last three years, oh, my God, it's a new, new thing. We're great at it. We're going to make you a fortune. Why is that? Private equity kind of hit the skids. Nothing was getting sold. They need to raise new money.

We haven't had defaults in 10 years. So a manager shows up and says, look at my track record. I can earn, you know, with two times leverage, I'll give you 10. percent return after fees. This is fantastic. Private equity sucks. Come with me. Of course, we haven't had a credit cycle in 10 years. So those stats are all garbage. Yeah. You know, actually go through a credit cycle and you have two times leverage on that thing and you start having the faults, which we've had a few of all of a sudden. It's not really exciting. Hello, I'm Michelle Hussein. And for more than 20 years, I was at the BBC.

Military withdrawal from Afghanistan. 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. This is love you trying ever saw. 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. It certainly asks interesting questions. What separates good leaders from transformational ones? I'm Jessica Chen, and in season two of Leading By Example, we'll sit down with executives like Grace Chen of Bertie Gray to find out. It's important to understand where you spy.

but also really acknowledge where you don't and find people who can fill those gaps. Listen to leading by example, executives making an impact on the IHeart radio app, Apple Podcast, or wherever you get your podcasts. Can I ask one macro question in this conversation, which is where do you think we are in the credit cycle at the moment? I've given up trying to predict it. Credit today is pretty good, better than pretty good. A lot of the leverage that's in this system that everybody complains about. are actually with things that are very good enterprise value.

So I don't worry so much about the disappearance of a company. I think about it in terms of reallocation of the ownership structure. If they're over levered, they go down. Either private equity firm bails them out, or they say, no, here are the keys, and now the debt holder owns them, and then the debt holder restructures the debt and sells them again. Somebody lost money, but the company's still a good company. It was just over levered to go.

Most of the noise you're hearing right now on credit beyond the fraud, you know, the cockroaches that J.B. said come out when things get stretched. Most of it are decent enterprises just over levered. And then, of course, you have the fraud. You haven't had anything that's really going down today because the economy just crashed in a spot other than some isolated issues with tariffs. There is a cyclical element to fraud, right? Because in good times, people look the other way. and I don't think it's cyclical. I think it's always there. I just think, you know, the, who is it said, you know, when the water goes out, you can figure out who's swimming nude? I think it's Buffet, right?

It's Buffet, right? Well, Galbraith, however, talked about the bezel, right? The, the, the, the, the, the, the, the, the, the, the, uh, the propensity of flim flams and scams to exist during the good times. And people just, like, don't. And that accumulates and accumulates. That could be. We've had like 20 years. As you said, like we haven't had a credit say.

I mean, it's almost 20 years since the financial crisis now. Yeah, the finance always finds a way to blow itself up. I mean, it's, I mean, duh, you know, it's not an opinion. And just look at history. I think what happens is you get, you get, you know, we find good things and then you write them. And you, in every instance where something's going wrong, you just keep pushing on something until you take it over the edge. Right. Finances in industry where historically you can make a lot of money at it, right?

You're playing with other people's money. You know, pennies and nickels come off of other people's money. I'm just going to keep pushing. I'm going to keep pushing on keep pushing. When it finally falls, it falls hard. We haven't had that. You know, what's the new, new thing? Now it's FinTech and it's crypto and it's, you know, banking has been kind of throttled by regulation for 10 years.

Well, speaking of finance, always finding a way to blow itself up. Can we talk about Silicon Valley Bank and 23? Because, you know, they managed to blow themselves up for a variety of reasons. But one of them was they just had too many bonds, which is kind of, you know, an unusual one. What was that experience like for you, first of all? Let's go back to Silicon Bank. I actually think they had a great institution. Who's been saying that?

Who's been saying that? Many times on this podcast. Wrong. Wrong. The Silicon Valley Bank respecters. Okay, keep going. No, it's just, it was a unique business model with a very loyal client base that they. Not that loyal in the end. I mean, look, you know, if you're dying, loyalty goes out the window.

But they blew themselves up in something that was not at all quarter of their basic business, right? Interest rates are super low. They got as long by some calculations as like long-term capital was back in the night. I mean, they were really, really levered and underestimated the negative convexity deposits, right? You think, you know, on average, through the cycle, they're going to be there seven years. Oops, they're gone tomorrow. And so they just, they blew themselves up on rates that had nothing to do with their core competence or what they were as a franchise. And it's, it's unfortunate.

It was a rookie mistake. There was nothing. It's just a crazy position to be in. How scary, you know, those days afterwards. And then people started hunting for, like, any. any bank that had the word California in the name, like people were shorting it or people were selling it. Or, you know, you had headlines where, you know, the regional bank index, the regional bank index is why I'm a national bank. We are not a regional bank because the next time they put regional bank headlines in there, I don't want to be associated.

Yeah, yeah, I get it. No, we actually benefited during that. You know, we're a safe haven and we actually gathered deposits and open thousands of new accounts during that period of time. and then every day somebody would flash the regional bank index and we'd get blasted on our valuation, which is fine. It always, you know, valuations are short term. It all came ripping back after that. So one of the issues that came up during the 2023 banking drama, I guess, is the discount window and banks reluctance collectively to use it.

And this is something that the Fed's been trying to change, right? And actually, do you remember in late 2022, there was a big spike in TAS? taping usage of the discount window. And it turned out that wasn't any of the banks that ended up getting into trouble. It was Beale Bank down in Texas. She's a weird bank. Yeah, it's a very weird bank. But anyway, regulators trying to get banks to use the discount window more, feel more comfortable with it.

How do you feel about it? But that's a great question. So before the financial crisis and before regulation, in LCR and long-term proposals and all that other stuff, there was a very active Fed funds market. So in a given day, the excess reserve of bank would hold deposited in its Fed account was tiny. And we would trade Fed funds around with each other. If I needed $2 billion, you'd give me $2 billion. Next day, I might give you $2 billion, like big size Fed fund positions. And that's how you balanced your books at the end of every night. And then they come out and they say, hang on, we don't want you doing that

anymore. There's an LCR requirement. You have to have this much liquidity stuck aside instead of going into the Fed funds market that gave rise to all these excess reserves. Fed fund market is basically dead. The Fed sets that rate. Nobody trades on that rate. It's as dead as LIBOR. It's gone. I don't even know why they talk about it anymore. Now you have, they basically said, you don't use the discount window and hold all this cash. You just froze the economy because you stop the circulation of capital transformation. Home loan bank step in. Because I have to hold all of these treasuries and mortgage securities, I can pledge them to home loan and they'll lend me money at a pretty good rate. So that's going to be my outlet. I'm going to go to home loan and I'm just going

to borrow there at a pretty good rate or I'm going to repo my treasuries that I hold. Silicon Valley happens and they had home loan lines. They didn't have any discount window lines. Now, the discount window will lend against treasuries and agencies pretty simply because it's basically settled electronically through effectively the Fedwire system. If you're pledging loans, it's really hard to pledge. So if all I have is securities to pledge, I should just repo them or I'll give them to the home loan bank. Discount window will do more than that. But if I want to draw against my loan balance, I need to give them physical wet signature loan docks in a vault, guarded, audited, 24 hours a day. Like there's got to be a guard and I have wet signatures stacked up.

So they know that when I draw against that loan, I actually have that loan because it doesn't settle Fedwire like a bond does. This is a loan, right? I'd lend you money. You sign the thing. I put it in the drawer somewhere. Then you say, all right, let's preposition these loans. We spent, PNC spent millions and millions and millions of dollars. So the vast majority of our CNI loans are now at the discount window.

We don't borrow on them, but they're there. If we wanted to borrow under them, I got a call. It's gotten a little better. But basically, like during COVID, you know, or post-COVID when nobody was coming in the office, you'd call, like the way you borrow from the discount one is you call Cleveland. There are Fed 12th. And then they say, oh, okay, yes, you're in good shape. We'll allow Washington.

to allow you to use the discount window and then I'll call Washington and then maybe like a day or so later, you can have money. When nobody is coming into the office, nobody would answer the phone. I got to draw in the discount window. They just rings. Nobody's there. God, there's no system. It's not like I can type in and draw. It's not like I can do a Fed funds trade through a broker and draw the money.

It's unusable. But now you're pre-positioned to borrow against loans if you need to. Yeah. We have enough liquidity on hand basically to cover anything that can happen because, We positioned all of our collateral and the optimal spots. Are you talking about physical spots? When you say you're talking about like wet signature document. Yeah.

So the only place you can borrow against C&I loans in effect is the discount window. So okay, so they're going to go over there. That's wet signature. I can borrow against securities in the repo market at the home loan or the Fed. So this is kind of the confusion that happened where was stuff pledged with Silicon Valley. I have 50 billion of cash sitting on the Fed's excess reserve book. So that's instant liquidity. And I own a whole bunch of treasuries that I can sell if I had to.

So you figure out how do I optimally earn whatever I can on these assets I'm pre-positioning, but get them in the right place so if I need liquidity in an emergency, I can get it. Silicon Valley did not do that, and the Fed did not make it easy for them to do that. And I'm just trying to be clear. When you say get them in the right place, you mean like a physical place? Some of it's physical. Like the loans, the wet signature loans, I literally think we take them down to like a vault and spin a dial, you know, with the big crank and they get locked in there.

But no, securities by QSIP, you would say like this batch of QSIP is prepositioned with the Fed. So I just know where they are. I know the balances. I know I can send them right over Fedwire and draw on that. So it's that thing. Yeah. One thing I always wondered with the discount window. So part of the reluctance historically to tap it on the part of banks has been they're worried it'll get out into the market, right?

And there'll be rumors that they're tapping the market. How does that actually happen? I don't understand how that info leaks. So in theory, because let's imagine somebody drew on the Fed. So the discount window is regional Fed. Let's assume somebody took down 100 billion from there or even 20 billion. from the discount window through the Cleveland Fed, can only be PNC.

So the people can figure out who it is, so why are you doing that? And then I got a story and I got to explain it. Where I think this should go, so go back to the original where I said Fed funds is dead, nobody trades it. We ought to just trade the discount window, right? The discount rate ought to be,

I'm just lending and borrowing all day long. I can leave money excess reserves, right, if I have money to give, and I can borrow money, discount window when I need money. And there ought to be like a five basis point bid or offer on that. You'd put more liquidity into the system here to grow the economy if you did that, you know, in a great way.

But it takes like they wiped out LIBOR, they wiped out Fed funds through all their LCR requirement. You know, you have the discount rate. Just bid offer on the discount rate. And then all of a sudden discount window becomes right way transaction. It's happening every day. Yeah. So you have to forgive me because there's a lot going on in the world these days.

So I can't pay attention to everything. I have no idea where you stand on yield-bearing stable coins, which I understand to be a big thing. Oh. Of debate in the sector. And I'm, again, I've been paying attention to the other things, but I see headlines about this pop-up. Yeah. So Stablecoin legislation, Genius Act comes out. They left a little loophole in there.

They said no interest, but it kind of got run around by offering rewards. promos. Same thing. Clarity Act is what's being debated right now. They're trying to close that loophole. They being kind of banks and people around banks, keeping the loophole open as crypto. You know, why not? If you can pay interest, it's going to drive volume. I want to pay interest. Banks say, I don't want you to pay interest because you're going to potentially suck deposits out of the system and you're messing around with the capital system that's worked for 250 years. You're sure you want to mess with it. At the end of the day, I think of, I think, the following. Stable coin has been built, launched, marketed as a payment mechanism.

It's somehow, by the way, I'm not sure it will, but it's going to make payments easier, faster, cheaper, whatever. Not as an investment vehicle. An investment vehicle is a different animal and needs different regulation. So all of a sudden, like a stable coin that's buying T-bills that pays you interest, that looks an awful lot like a money fund to me. And that's fine. If it's a money fund, then regulate it like a money fund. Can't break the buck. You've got to have this much liquidity on hand. You know, all the disclosure rules that go around with it, then do what you want with it. You know, go ahead and pay people in money funds. I just think they're mixing things. And I think, you know, my, my uninformed

worry is we're not done blowing up in crypto yet. Right? It's in fits and starts as you learn these things. Why do we need to start everything at once? Let's figure some stuff out. If it works and there's a logic to doing it, then go ahead and do it later. I just, I don't know that you need to do it all at once. What's the rush? Yeah. You know, we are coming up to the Super Bowl. And when I think of the Super Bowl, I always think of the Basel Endgame proposals and that ad that they ran in 2024. It was surreal, wasn't it? It was a very effective marketing tool. at least for me. And we are expecting a reproposal of the endgame. What's your sense of what might change between, you know, the original document or suggestions versus now? I have no insight

information on that. But the original proposal that was written was in contempt of math. They basically, they had a goal of raising capital and then they used bad math to cause that outcome, which was a lot of what the outrage was over, because if you start making up rules and capital allocation, you inadvertently cause risk to emerge in places that shouldn't. So I think the math is fixed. You know, the lawsuit on the stress test and the fact the models need to be public, so the math is going to be a lot better on what they measure. You've heard about indexing G-Sib scores to inflation and some of the boundaries.

I don't know what they're going to do on operated risk capital. It's been a fight. I think they're going to give some credit on credit risk ratings that Europe gives that we don't. And my guess is there'll be something in there for everybody. And then everybody will collectively be disappointed about something. They're not going to give away the shop, but they're going to try to make it directionally correct and based on real math instead of made up stuff. I want to go back to something you said about the bank integration. and you actually gave a very rare, I would say, actual 2026 application of generative AI implementation,

where you mentioned that the person at the local bank branch can actually like ask a question about the policies and learn. So that wasn't just a hypothetical. That's a real thing that's happening right now. Yeah, that's true. Can you talk, this is a theme that's been we've been talking about on the podcast lately, which is, you know, not just. AI per se or implementing, or we're going to like implement AI, but like, you know, the changing relationship between a company and their software vendors and, you know, does AI change some of these relationships?

Do you have leverage because there are certain like niche functions that you could like build yourself? Can you talk a little bit about how you're seeing some of these things play out within your firm? Yeah, this is fun because there's so much bad information about that. So start with the basics. In order to utilize AI, you need clean data. define data with a single source of truth. We've spent 10 years doing that in a fortune.

So, you know, silly as that sounds, think how many different places inside of a company you might have, you know, a checking account balance that's then morphed into the average checking account balance over seven days or the median or the this or the that. And so when someone's trying to pull data to run a reporter, build a model, they don't even know what they're real,

they don't even know what they're pulling. So you've got to get it clean at the base source. and an index. Now you have the capacity to build a model, whether it's large language or analytical. Large language models, there's open models out there you can just use, which is what we tend to do to build our document sorting. We're using it on our own data, our own documents. I don't need their data. And I don't need to retrain their model per se other than running it on my own data, which is a much smaller compute factory. I don't have the whole internet downloaded. I just got this thing, right? And then once we train the model,

Running the model doesn't take a lot of compute. Training the model takes a lot of compute. When we implement talk about AI, some of it's the fancy object thing. Oh, I'm going to implement copilot. Now people can write emails for me. Everybody knows when co-pilot wrote my email because it's way too polite and the punctuation is correct. Does that make us any money? Probably not.

But it's cool. So when you hear most people say, oh, we're using AI, they just plugged in co-pilot and paid somebody $20 million. in box a year for licenses. Where it starts to make a difference is when it can answer questions in a hurry for our employees or our clients and where it can automate process the same way we've been on this automation journey for 20 years now, right, starting with internet and then kind of microservices and applications. AI is just the next stage of that. You know, we've got, we over the last 10 years probably get 30 points of productivity efficiency. in our operating environments, probably less seven years, actually, AI is going to give us another 30.

And it's going to come through time. But think of it as automation. All it is, even when people talk about AI, they'll say, oh, you know, it's an AI model. It's not an AI model. It's just a decision tree. You know, it's automating a script and an answer, moving data in a way where somebody doesn't have to swivel, you know, pretty basic stuff. What about on underwriting?

Would you use AI to automate that particular process? It's actually not legally allowed today. So there's, I mean, it's truth in lending or something. You know, one of any of these laws where if I tell you no, you applied for your credit card, they just kept my rates at 10%. So I said, no, I've got to give you the three reasons, you know, of why I said, no, with an AI model, we look at a thousand variables. And the weight of each of those variables is dependent upon their interaction in your particular profile.

So the weight of rent might be very heavy for one person and not for another based on the profile. I can't give you three reasons. The model told me no. The model told me yes. So what ends up happening today in credit decisions, this is crazy, but it works, is we'll set with our normal criteria, this FICO, this debt to income, you know, whatever. else you look at, we'll say yes or no. And then if we tell you no, we'll use AI to try to tell you yes. Because I can still use my original excuse is no, but if I turn you to say yes after the fact you're not mad at me. So the point is, it's crazy. But the point is that legally speaking,

if you say no, you have to be able to articulate a reason. Yeah. So what ends up happening is everybody sets this bar way too high. This is one of these silly rules that needs to be. looked at. I mean, we do use, it's not so much AI. There's a lot of decision tree models on automation that help with underwriting, but it's not necessarily a machine learning application. Tracy and I mean, I find I get this idea of like AI as another form of workflow automation, very intuitive. Yes. Tracy and I used to publish transcripts of the podcast, but it was a very labor intensive process to like clean it up, et cetera. And so I thought like AI was going to be the panacea. clean this text.

When we were doing it, it wasn't there yet. It was like creating fake. It was creating sentences that weren't there. But I understand this intuition that AI can then be like trained on a repeatable process. Right now and again, the things that we call AI, which do today's large language models, those workflow automations like are there certain workflow automations that today, workflow processes that you can say we've been able to automate them in a way we couldn't have five years ago. Oh, absolutely.

But let me just give you kind of some scope and some numbers and what's actually happening. And we have a pretty clean tech stack, so maybe we're a little further ahead at this than some. But we focused on a billion four of addressable spend inside of our care centers and our operating environments. This is just solving problems for customers, moving loan, all that stuff. A billion four we spend. We've come up with 171 different ways. to use AI in reducing that spend. And the addressable piece of the billion four,

we think is probably 40% of it. Of the 171 use cases, we prioritize five that are live. And so what does one of those look like, for example? So imagine inside of our wealth business, we got a bunch of trust lawyers. So my grandfather, it's actually with P&C, my grandfather created a small little trust, skip generations.

And it's written beautiful. It's for handwomeness. written on like three pages. Maybe it was my great for grandfather. Some lawyer every month has to look at that thing and say, you know, this qualifies or doesn't, or we're going to do this distribution. All of those things are manual.

Now just read them into the document writer and all of the things that are mechanical outcomes from those millions of pages of trust documents are right in front of you, right? Payment on this state. Here are the beneficiaries. It just makes

it real simple. So document reading, expression of what's in documents on the basic stuff. You know, no, I don't have to just go and search and find and human error. That stuff will make a difference. I worry, we have too much focus on the cool, fun toy. ChatGTP. I mean, this is, you know, it's a new Google search. It's cool to give me the answer.

That isn't going to make the world better if that's all it's used for. How did you get a clean tech stack? Because this is something that also goes hand in hand with bank consolidation. You always hear that, you know, banks end up with this tangled mess of technological systems, maybe some that include Kabul or like old languages and things like that. Cobol, Cobol, I can never remember. You can't even, yeah, you weren't even born yet when we were programming in

COBOL. So how did we do it? How did you manage to do that? So honest answer, right in the middle of the financial crisis, right? We merged with National City under duress from both firms, kind of a regulatory wedding. neither of us had the capacity to run a larger firm. I mean, I distinctly remember, you know, talking to the combined organization, we have to rethink how we run something.

You can't manage by walking around anymore. And neither tech stack could survive on its own. And so we saved less money than we said we would in the announcement, or actually we saved what we said we would save, but quietly we reinvested $2 billion a year for 10 years. Wow. Yeah, so literally all knew we went from single server stack application. So this computer runs that application,

and each computer is different because whoever the application owner was, went to dinner with Dell that day or HP the next day. We had 11 data centers. None of it was in a virtual environment. So building our own first cloud environment. And then secondly, writing everything in cloud language in a microservice application. So it's cloud native. That's forever.

But we spent a ton of dough and just have invested, invested, invested, and got to a place where our tech stack is as modern as any fintech you'll find out there. All right. This is a lot of fun. Thank you so much for taking the time. We had a lot of questions. Thank you for being interested. Yeah. That was great.

That was great. Really appreciate you. coming out on odd lives. Yeah. Good to be here. Thank you. Tracy, I really enjoyed that conversation. I learned a lot about banking in that conversation.

We hit a lot in that. But I just wanted to keep going. There were so many interesting angles. Bill actually answered the questions. Which cannot be said for every CEO. No. I would say most of our guests are very good at answering questions. Not every CEO is great at always answering questions.

But I was like, oh, I'm like learning something with each one of these things. Let's keep going. Also, genuinely, he seemed to have a good handle on like the granular. and practical aspects of running a bank. So I was really interested to hear how they redesigned their tech after the financial crisis. I guess they got a head start on everyone else. And then also the prepositioning of collateral at the discount window. I knew that the Fed had been encouraging banks to do it.

I did not realize that you had to send the actual mortgage docs if you would borrow against those. It is crazy how much is not just done automobiles. electronically, right? And here was, I didn't ask it, but I was going to ask, does blockchain solve this question? But the idea that like, okay, all of these things really are electronic-ish, although there's clearly this physical component, but the idea that here is something, which is theoretically monetizable, which has liquid value, is a liquid instrument, but because of the way that the system is structured, cannot actually be liquidated or turned into liquidation. assets immediately, if it had it were not prepositioned, et cetera, that actually does still seem

a little bit wild to me that that is the case. I always thought that mortgage assignations were like one use case for blockchain, right? Yeah, yeah, yeah. You could reasonably see blockchain, you know, helping out with that problem versus, I don't know, tracking the origins of lettuce and things like that always seemed kind of ridiculous. Well, it seems like one of these things, which is in banking and again, it's like, integrated databases. So there's like a be a central bank database. There will be a home loan bank database and the regional bank and the bank database, right? And the question is like,

why can't they just all see, talk to each other? You see the relevant parts of the database, right? And I suppose that's easier said than done. I really like hearing him talk to about practical applications of AI, which again, maybe it feels a little different than some of our conversations last year or it feels like now there's more articulated examples of this is a sort of labor saving or time saving technology. So that's another thing I think we have to pay more attention to in 2026. Also, the database issue in the context of AI is kind of interesting because we were talking about how so much of programming nowadays, so much of the tech issues are those coordination problems. Yeah. Yeah. And so even if we have something like Claude, we recorded that episode

recently. Even if you have Claude writing software, it doesn't necessarily solve that coordination issue. Totally. And then, you know, bank branches, how crucial they are. Yeah, that was surprising. I had heard that, you know, there's, again, it may be just like one of those sort of things people say, like people are less likely to switch banks than they are to get a divorce. And so therefore, it still makes sense to build out a physical branch. But like the strategy of that and thinking about where and how the fact that they're building hundreds of branches still, even if the total number of bank branches is actually declining, that's just like a super interesting, real part of the business.

It is true that I've had the same bank since college. I don't know about you. And I hate them and I still only. But since I moved to New York, yeah, since I moved to New York, I think I've had. So that's 21 years. So basically, yeah, one bank. It's kind of wild. I'm going to switch.

I'm going to prove the, the anecdote wrong. They're just going to switch for the hell of it. Yeah, absolutely. Okay, shall we leave it there? Yeah, let's leave it there. This has been another episode of the Odd Thoughts podcast. I'm Tracy Alloway.

You can follow me at Tracy Alloway. And I'm Joe Wisenthall. You can follow me at the stalwart. Follow our producers, Carmen Rodriguez, at Carmen Armad. Dashel Bennett at Dashpot and Kel Brooks at Kel Brooks. And for more Oddlaws content, go to Bloomberg.com slash OddLaw. To have a daily newsletter and all of our episodes. And you can chat about all of these topics 24-7 in our Discord.

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