ACTV - Banking: The Future Is Accelerating

2023-03-23 17:08:17 ET

Summary

• Banking crises are often the cause of rapid change in bank regulations or banking structure.
• The current situation may be just this kind of stimulus as the movements of Treasury Secretary Janet Yellen and Fed Chair Jerome Powell give one some hope of this result.
• Ms. Yellen has seen to it that all depositors at commercial banks are covered by deposit insurance, reducing the threat of bank runs in the near future.
• Mr. Powell has gone ahead and produced an increase in the policy interest rate of the Federal Reserve, even with several bank failures being settled.
• The hope here is that U.S. policymakers are working to change the structure of the banking system, changing it in a way that would include a Central Bank Digital Currency (CBDC).

Jane Fraser, CEO of Citigroup, Inc. (C) is raising the real threat of technology and banking. Her take on the situation :

"Mobile apps and consumers ability to move millions of dollars with a few clicks of a button mark a sea change for how banks manage and regulators respond to the risk of bank runs."

Of course, the example of Silicon Valley Bank (SIVB) is immediately brought up as an example.

And, as I have written about frequently over the past three weeks or so, the timing of the recent bank failures has been very inconvenient for the policymakers at the Federal Reserve, given they are in the midst of a battle to substantially reduce inflation.

But, yesterday, the Federal Reserve did go ahead and raise its policy rate of interest by 25 basis points.

The stock market dropped: the Standard & Poor's 500 Stock Index dropped by 66 points and the Dow Jones Industrial Average dropped by 530 points.

A lot seems to be happening although the policymakers are not telling us much about why they are acting the way they are.

Fed Raises Rate

First of all, the Federal Reserve did raise its policy rate of interest. Although there was concern about the Fed making a move at this time, Jerome Powell, Chairman of the Board of Governors of the Federal Reserve System, felt strongly enough that the Fed could not "back off" from its monetary tightening program.

So the Fed moved.. and indicated that there would probably be more moves in the future.

The one thing the Federal Reserve had going for it, given the current situation, was that Janet Yellen, U.S. Treasury Secretary, moved to secure the protection of all depositors. The word was released that "all" depositors, no matter how much money they had on deposit at a bank, were covered by the government's insurance.

This action should secure the banking system of any further "deposit runs" at this time.

So, for the time being, the banking system seems protected.

But, these actions pushed me to do some further thinking.

The "New" World

Ms. Fraser of Citigroup gives us the reality of the situation going forward.

The changing technology is impacting how banks are managed and how banks are regulated.

And, it is not a surprise, because history is very consistent on this point, changing technology is a major driver of major changes in how industries work and survive.

Changing technology very often causes changes that force an acceleration of the transition to the "new" world that is evolving.

And, that may very well be happening at this very moment.

As I have argued, the world is becoming digital, and sooner, rather than later, everything will have a digital foundation.

Money and finance are nothing more than information, 0's and 1's.

Why shouldn't money and finance become primarily digital.

It's going to happen sooner or later.

Why not now?

The Current Movement

Maybe now is the tipping point to this new age.

The United States has seemed to be lagging other parts of the world in terms of the amount of digitization that is taking place within the financial community. They have received much criticism for this behavior.

But, now, maybe generated by the current number of bank failures, the Fed, and the Treasury and the Federal Deposit Insurance Corporation and the federal government are really taking a step forward.

Let's look at this picture.

The Federal Reserve was reluctant to raise its policy rate of interest at its meeting of the FOMC this week.

Mr. Powell and others had the concern that if they raised the rate there might be further bank runs.

In order to prevent further bank runs, Janet Yellen led a successful effort to extend, at this time, deposit insurance to all depositors, no matter how much money they had on deposit at a bank.

Doing this in the past was frowned upon because it was believed that this would create a situation that banks would take advantage of because all depositors were covered and the managements of the banks would not have to worry about dealing with a bank run.

So, there has been quite a bit of skepticism about this move to totally insure all deposits and depositors.

But, what if Ms. Yellen, Mr. Powell, and others have something else coming down the tracks?

What if they have another plan that will also prevent "bank runs" but will also bring the banking system into the future?

New Plans

I have written two posts recently, here and here , that suggest how the banking system might evolve into its digital future, a future that was free of "bank runs."

This future is all tied up in the evolution of Central Bank Digital Currencies.

A CBDC is simply a fiat currently issued by a central bank in digital form as a complement to, or in place of, physical currency.

In practice, a CBDC can be issued in multiple forms, with a range of implications.

For a great source on CBDC's I would suggest the book by the well-respected economists Eswar S. Prasad titled "The Future of Money: How the Digital Revolution Is Transforming Currencies and Finance" which is published by the Belknap Press of Harvard University Press (2022).

Much of what Mr. Prasad writes makes much sense and seems to be a guide to what the main currents of thought are pertaining to CBDC's.

And, much of the discussion gets into the conflicts caused by commercial banks trying to combine a payments system and a credit system within the same organization. In fact, it is their separate functions that are the basis for bank runs. CBDCs, get away from this conflict.

Furthermore, Mr. Prasad also gets into the place of DeFi (Decentralized Finance) in the modern world and how commercial banks must pay heed to what these organizations are trying to accomplish.

I believe massive changes are in store for banking and finance and they are all digitally-based.

Moving On

My basic point today is that the current banking crisis may serve as the tipping point for the next technological change in the economic system, a change impacting particularly money and finance.

I have suggested that Ms. Yellen and Mr. Powell and others have put together a plan to move the U.S. financial system forward into the digital age, an age that would feature a Central Bank Digital Currency.

This would seem consistent with the fact that Ms. Yellen got deposit insurance extended to all depositors. It would be consistent with Mr. Powell's confident move to raise the Fed's policy rate of interest at this time.

It would seem consistent with the need of U.S. policymakers to move the U.S. financial system into the digital age.

For the sake of the banking system, the economy, and the U.S. dollar, let's hope this is what is taking place.

For further details see: