QQQ - Digital Banking: Have We Arrived?

2023-04-21 10:52:25 ET

Summary

• The story is that the Silicon Valley Bank failure is "the world's first Twitter-fueled bank run."
• The world of banking and finance has accelerated.
• Still, solutions to this problem have tended to focus on upgrading the current banking system so as to meet the opportunities for funds movement now existing.
• The world of banking and finance is going to continue to accelerate.
• The banking system must be restructured to accommodate advances in information technology and the ability and desire of customers to use the advancing age.

Since the collapse of Silicon Valley Bank of SVB Financial Group (SIVBQ) last month, more and more questions are being asked about the structure of the United States banking system.

And, the questions are becoming even more "digitally" specific.

For example, Gillian Tett, writing in the Financial Times , reports,

"When SVB failed it was dubbed the world's first 'Twitter-fueled bank run' by Patrick McHenry, House Financial Services Committee chair.

Research following up on this statement found that

'banks with a large pre-existing exposure to social media performed much worse during the recent SVB bank run.'

The granular pattern of tweets suggests that 'investor conversations spilled over into depositor conversations.'

In other words,

"Social media is not merely a 'camera' of events, but an 'engine' driving them as well when combined with 24-7 mobile banking."

Ms. Tett lists several specific problems that exist within the current system, but then expresses the generic issue:

"Information moves so fast in cyberspace that it is hard to detect what is accurate and what is not."

"And, while this leaves some beleaguered bankers eager to muzzle social media, this seems almost impossible to do right now."

So, what should be done?

Ms. Tett proposes three things that might be done to lessen this problem.

All three have to do with regulations that attempt to deal with the "speed" at which information is transferred in this modern age.

But, as Ms. Tett concludes, the answers to the questions she raises are "completely unclear."

The Problem

As I see it, the problem with this approach is that Ms. Tett approaches the issue from the past.

The solutions she suggests basically are attempts to "slow down" how things take place in this modern "information age" and give participants and regulators time to recognize the need for adjustments, and then to give them time to deal with what is happening.

To me, this is "old school" and is exactly what banks and regulators try to do right now, only taking modern technology advancements into account when trying to "slow things down."

The underlying problem: Money is information...just zeros and ones.

Information technology has changed the picture as it has evolved to the point where information, any information, can be transferred fast.

And, the reality of the situation is that the transfer of information is only going to get faster going forward.

Building a solution to the banks' problems, as Ms. Tett does, based on past technology, will not do what the world needs. It is only a small band-aid.

Any real "solution" to the current "banking problem" must look forward into the future.

Money is information.

Information is going to grow and spread.

Information is going to be transmitted faster and faster.

This is the reality of the situation.

The Near Future

The battle that is going to result from this development is one that will result in the restructuring of the U.S. banking system.

I see the battle unfolding in this way.

The biggest, most successful banks have the technology and are creating the structure for the new world of banking.

Right now, the cut-off for fitting into this category is $250 billion and above in assets.

The smallest banks, those with only $10 billion in assets and below, will remain small, will continue to basically just serve their community, and will not have customers that depend upon the advancement of technology to support their needs. Customer loyalty will support their business.

Those that will suffer?

The banks in the middle, whose customer base is more sophisticated when it comes to wanting more technologically advanced services.

The biggest challenge for these banks in the middle will be the fight for deposits .

This is the narrative you observed when it came to SVB.

Modern information technology, Twitter, is going to drive the competitive efforts of this range of banks, and the competition for deposits is only going to intensify as the technology improves.

As competition builds, deposit rates will experience a rise relative to loan rates and the net interest margin of these banks will decline.

Greater scrutiny of loan quality will occur.

Whatever, the biggest banks with their ability to diversify their operations and achieve scale will be much more competitive than the middle-sized banks and hence the banking industry will shrink.

Later, as information technology continues to spread, even the smaller banks will become less isolated and forced to compete more for deposits. So, the proportion of smaller banks in the banking system will shrink.

The change in technology is going to impact the scale of banks.

The growth and spread of information technology is going to result in a major restructuring of the commercial banking system.

The Future

The way to regulate this new banking structure may be to change its structure, not just put in procedures that slow down "banking."

If the structural problem that is now creating problems of "speed," then maybe the structure needs to be changed.

Right now, we are in a banking system that only requires part of a deposit to be reserved so as to have money available when deposit monies leave a bank.

Maybe, given the speed of transactions and money movement in this day and age, we need a deposit system with 100% reserve backing?

I have written about this earlier in another post.

The partial reserve deposit system arose because people did not access their deposits that often or that quickly. Thus, bankers found that they only needed to keep a part of the deposit "on hand" in order to meet the possibilities that the funds would be withdrawn.

The "speed" of deposit usage was slow.

Fractional reserves could handle this.

Now, we are seeing that the changing technology allows depositors the ability to access funds and move them almost anywhere, when they want to.

Information on competitive deposit rates is more accessible now, and the ability to move the money is growing.

This situation is only going to speed up.

So, maybe a banking system with 100% reserves is the banking system of the future, the one that can serve the "information age."

And, this 100% reserve system would be an integral part of the digital age.

In one way or another, this age is coming.

We need to work toward the building of this system. We need to focus on the future, not the past.

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