The Massive Shift Underway in the US Banking System

Joe Weisenthal (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:15)

And I'm Tracy Alloway.

Joe Weisenthal (0:17)

Tracy, it's been about, I guess, three months or so since the SVV blow up, and I don't know, people, it sort of seems like a thing of the past now.

Tracy Alloway (0:26)

I'm trying to remember when I went on vacation. I guess it was March. So yeah, I guess three months. Can I ask, before we start this conversation, are we gonna call it a crisis or not? Because that seems to be a new terminology debate.

Joe Weisenthal (0:39)

Well, yeah, it's a good question. I'm team anti-crisis, but also I remember you were on vacation and I remember you're like, oh God, I'm missing a financial crisis. And I was like, no, no, it's not a crisis. Enjoy your vacation. It's not worth like...

Tracy Alloway (0:52)

It was still the most interesting thing to have happened to banks in many, many years.

Joe Weisenthal (0:56)

It was very interesting.

Tracy Alloway (0:57)

All right, well, let's agree to call it drama.

Joe Weisenthal (1:00)

Drama.

Tracy Alloway (1:01)

Drama. That works for everyone.

Joe Weisenthal (1:03)

It was drama. I think that's right.

And after that, there were all these questions, like, why do we have thousands and thousands...

Tracy Alloway (1:10)

Why do we have banks at all?

Joe Weisenthal (1:11)

We did. We had like an episode where we said, why do we have private banks?

Tracy Alloway (1:14)

Oh, that's true. Yeah, we did do that episode.

Joe Weisenthal (1:16)

Why do we have private banks? Especially if the depositors can almost always be guaranteed to be bailed out.

Tracy Alloway (1:22)

Yes. So it did raise some existential questions for banks. And one of them was the deposit insurance question that you just mentioned. But the other one was the nature or the breadth of the US banking system altogether. And this is something that I think comes up after almost every bout banking drama slash crisis. You saw in the savings and loan crisis.

Certainly after 2008, there was a lot of discussion about what should banks be doing? Do we need this many banks or are we comfortable maybe with merging some of them, consolidating them into megabanks?

And now fast forward to 2023, a lot of that consolidation is happening again. And we are seeing some of these same questions raised.

Joe Weisenthal (2:08)

Right. And I guess there's like this sort of two ways of talking about consolidation. One is like, could we see the giant banks just sort of like buy everyone else?

And then we sort of have like a Canada style banking system where there's like eight banks or whatever.

Or could it be like from the depositor perspective where they're just like, why wouldn't I just put my money at JPMorgan, the ultimate too big to fail bank, and then I sleep at night? And you know, and just why not? Right. And they have a good website and it works and all that stuff. And so there's just like, it feels like there's all these forces putting a lot of stress on the thousands and thousands of smaller community and regional banks out there.

Tracy Alloway (2:45)

Yeah. And at the same time, you know, this idea of small local banks is kind of embedded in the American psyche, I feel like.

Certainly going back to it's a wonderful life. Everyone has this notion of a cozy community bank where everyone kind of knows each other.

And so they put some value on that. But that's not the only way to have a banking system. You could have a Canada style banking system, as you just pointed out. So all these big existential questions at the moment.

Joe Weisenthal (3:14)

And to me, a bank is just an app at this point. No, for real. Like I have a bank that does not have like physical branches that I go into.

Tracy Alloway (3:22)

You don't have intense personal feelings for your bank?

Joe Weisenthal (3:26)

No, no, I have like it's like the app works. It doesn't crash. It's like, great, there's my bank.

Anyway, so what is the future of banks and what is happening? And will we have one day have a Canada style banking system? I think even though things have quieted down, it's sort of a good time. Actually, it's like take stock of what's happening.

Tracy Alloway (3:42)

It is always a good time to talk about the meaning of banks in America.

Joe Weisenthal (3:46)

Well, I'm very excited today. We have the perfect guest, someone who works directly in this space and has for a long time. We're going to be speaking with Scott Hildenbrand, Chief Balance Sheet Strategist and Head of Financial Strategies at Piper Sandler.