How Close Are Banks To Another 2008? Expert Reveals 'Pendulum Swing' | Christopher Wolfe
Summary
Regulatory Changes: The podcast discusses significant regulatory shifts under the current administration, highlighting a pendulum swing from strict regulations to deregulatory efforts, particularly affecting areas like crypto and consumer protection.
Bank Ratings: Christopher Wolfe notes that bank ratings have remained stable with some positive outlooks, particularly for regional banks like Key and Citizens Financial, despite the regulatory changes.
Crypto and Banking: The administration's pro-crypto stance, including the passage of the Genius Act, is seen as a strategic risk for banks, as stable coins could become alternatives to traditional bank deposits.
Interest Rates and Profitability: The podcast covers expectations for interest rate cuts in the near future and discusses how a steepening yield curve could benefit bank profitability by expanding net profit margins.
Commercial Real Estate Risk: The risk associated with commercial real estate, particularly for smaller regional banks, is reportedly diminishing as the sector stabilizes and hybrid work arrangements evolve.
Stable Coins and Financial System: The potential impact of stable coins on the financial system is discussed, with the possibility of them enhancing the dollar's status as a global reserve currency and increasing the velocity of cash and payments.
Economic and Market Risks: Indirect risks such as tariffs and the growth of private credit are highlighted as potential challenges for the banking sector, though not seen as immediate threats.
Future Outlook: The podcast concludes with a cautious outlook on the potential for regulatory changes to affect bank risk profiles, emphasizing the need for a balanced regulatory approach to avoid scenarios similar to the 2008 financial crisis.
Transcript
to the extent that stable coins for example become an alternative to bank deposits um you know can we you know can we see deposits leave the system uh in favor of stable coins that's a strategic risk or strategic threat for the banking system >> some skeptics of deregulation point out that uh this may endue years of tightening capital regulations from DoddFrank this could push us closer to a 2008 scenario in the worst case uh scenario uh you Well, walk us through the logic here. Is there a risk of everything being undone in the last 15 years? There are some major key changes in the regulatory environment of the current administration when it comes to the banking sector. We'll examine how these regulatory changes are affecting ratings of banks, the health of the banking sector. We'll take a look at that and whether or not the bank sector faces any significant challenges or headwinds today in 2025. Christopher Wolf, managing director of banks at North America at Fitch Ratings, joins us once more. Welcome back to the show, Christopher. Good to see you again. >> Thank you, David. >> You're on the show in May 2024, so just over a year ago. Let's go over some of the key calls you made last year on my show. Importantly, you said that um the banking sector didn't face any imminent threats um last year. uh in a peer review of 13 banks only one was downgraded several with negative outlooks uh you had preferred uh larger banks over smaller banks last year uh you had correctly called for rates to stay long higher for longer uh which has played out correctly and you said that the key differences between last year and 2008 was that 2008 was more about reckless lending and weak underwriting and last year the key risks were high interest rates and post-pandemic adjustments. Mortgage lending was also stricter last year thanks to DoddFrank. And importantly, you were expecting last year for more regulations, not fewer regulations. So, let's just walk through the changes in the banking sector uh over the course of the last year and how your ratings have changed importantly after the election. >> Sure. So, our ratings have been fairly stable. Um and in fact, you're starting to see a little bit more positive development. So we actually have two banks on positive outlook reg and the regional sector uh both key and citizens financial. So I think that's a key change and I and the landscape for banking has really shifted um very dramatically from last year to this year uh post election. So, a lot it's been a a big change and I think um especially when you pick on you pick up on the regulatory uh front of things, you know, had we had a Harris administration, we probably would have assumed more regulation coming through. Um but what you're seeing with under the Trump 2.0 is a complete reversal of that. In fact, they're going after a lot of regulations. um taking down uh a lot of things that were put up during the uh the Biden administration. So that's been a sea change. Uh it's really been like a pendulum swing from one to the other. Um go ahead. >> Uh I was just going to ask uh can you please give us a few examples of some of the reversals of regulations that the Trump administration is currently engaged in? >> Sure. Um, you can start with crypto is probably the biggest one where under under the Biden administration, crypto was very much disfavored uh and under the under Trump 2.0, it's very much in favor and you saw that with the Genius Act that was just passed. You also see that with um consumer protection. So the CFPB uh has been I I think a a uh you know a political football and so under Biden a lot of regulations uh came up through the CFPB and the Trump administration has been methodically uh tearing those down. Uh you're also seeing that with credential regulations. So the capital rules um they had they were set to get a lot tighter under under uh the Biden administration and now you're seeing almost a a reversal of that. you know, you're you're seeing that with the supplementary leverage ratio for the big banks that's being relaxed. Uh so you're seeing that on a lot of different fronts. So consumer protection, crypto, um anti-money laundering compliance, you're seeing that with climate risk. Um again, the Biden administration very much turned up the the the volume on climate risk and the Trump administration is um reversing just about everything uh the Biden administration had done on that front as it relates to banks. So, >> okay, we'll touch on crypto and some of those other key points in just a minute in more detail. I want to read to you uh more or for the audience a paragraph that you wrote and well you and your team wrote in an article, a report rather published in late April called US banks regulatory pendulum in is in full swing and importantly uh you wrote that the aim of deregulation is to lower compliance costs, encourage innovation in the financial system and remove barriers to credit access. Fitch. Depending on the finalization and interaction of these efforts, Fitch may view them as broadly negative for bank credit profiles to the extent that they lead to lower capital buffers that are not commensurate with the bank's risk appetite for banks with less rating headroom. Sustained erosion of capital buffers could lead to pressure in ratings. What does that mean? Are you actually more negative on the outlook for ratings given these deregulatory efforts? Well, what we're trying to say there is banks have actually benefited from having good credential regulation. Now, to the extent that that is being reversed um and allowing for more risk-taking to uh occur um at the same time that capital you know the buffer for you know kind of you know for losses is is potentially um being diminished. That combination could lead to um a more negative view on our on capital. So again you know US banks and one of the reasons they weathered the you know they were able to withstand some of the pressures you know um during the pandemic was very strong capital bases and so you are seeing u banks increase their dividends capital and and share repurchases um so to the extent that they're bringing down their capital that could be a bit concerning. >> Well do these deregulation efforts uh change the capital reserve ratio requirements at all? >> Not at the moment. So you know if you think take take for example the supple supplementary leverage ratio >> right now just bringing that down for the most part it it hasn't been a binding constraint. So there's still you know banks are still subject to the riskbased rules. Um but what we we haven't seen yet is whether or not the riskbased rules will get relaxed or not. So that's going to be something we'll see um probably either later this year or early next year. So that's that gets to the Basel 3 endgame that uh the Biden administration had proposed and and died effectively. Um but we expect to see something come out of that um sometime either later this year or early next. So the answer is we don't know and I don't think the banks know for sure uh what the direction of of travel is for for bank regulatory capital. >> What does lower uh capital buffers mean for consumers and businesses? Are we expecting or can you expect more liquidity in the financial system from more lending because of these uh deregula uh deregulation efforts? Yeah, to the extent that that you do see some meaningful relaxation of capital standards, you it does free up banks to do more lending than they would have been otherwise. And so, and again, you're seeing a lot of lending um migrate to the um private capital space um through the non-bank financial sector. And that's something I think you know policy makers are keeping an eye on. And so banks are being in some ways um less able to to in uh to uh to lend and so lowering some of the capital requirements may allow or free up some capital for lending. >> Well, is there an appetite or demand for more loans from either businesses and or consumers right now given the current macro environment? >> It's interesting. It's an interesting question because when you look at the uh the loan growth numbers um you're not seeing a lot in kind of just the uh traditional kind of consumer and commercial you know categories where you are seeing a lot of lending growth is lending to the non-bank sector. So banks lending to non-banks that has been growing very dramatically um and and it's really um you know feed you know fueling the growth in the in the private capital space private credit. Okay. Interesting. Last year we had talked about the risk that commercial real estate posed to banks specifically smaller regional banks uh many of whom have had exposure or higher exposure to CRA. I think up to 20 to 30% of the loan books uh tied to CRA and that sector posed a risk given the uh hybridization of work at home and or at the office. Uh how would you assess CRA risk uh C space right now in 2025? Yeah, I think the CRA risk has has is really starting to diminish and it's really starting to be, you know, looking, you know, become more of a rear view uh issue for for the banking sector. So, um you're starting to see some, I think, probably some bottoming out um at least in the bank CR portfolios, the the problems have already been identified. They've largely been reserved. you still might see some losses full come through. So, we're not calling a, you know, an end to the CR cycle, but what you're starting to see is valuations either um bottom out or start to firm up. You're starting to see change in the hybrid work um arrangement. So, you're seeing more companies uh require in office attendance more frequently. >> Um and so, you're starting to see some I think some positive improvement there. and and I I think CRA is becoming much less of an issue uh for the banking sector going forward. >> Okay. I know that uh you and your team haven't made explicit rate outlook projections. Uh but can you maybe comment on maybe stress tests that you've done on whether or not the banking sector faces more or less risk if let's say the uh Fed funds rate stays unchanged for the rest of the year versus a few rate cuts. Um what does that look like for banks? >> Yeah, so right now Fischer is forecasting just one rate cut. um in in the fourth quarter of of this year. So, and we do expect some further rate cuts in 2026. So, the direction of travel is likely to see some some uh uh rate cuts. Uh that's going to be on the short-term side. It really comes down to what happens on the long end of the curve. So, uh just because the Fed cuts short-term rates doesn't mean long-term rates will come down as well. So, the slip the slope of the yield curve will matter for banks um going forward and we'll see where the Fed policy ends up. I I think markets have been expecting some rate cuts. Um but we'll see when and you know when they happen but we you know we do think the banks will be um well positioned to manage um a down rate trajectory. Uh particularly if it's measured. So 20 you know if it's a 25 basis point cut here or there that that should be easily um manageable for the banking sector. We don't see that as being a stress factor. >> Okay. I want to touch on cryptocurrencies. Uh now as you said one of the major changes in this administration's um regulatory profile versus the last is changes to the uh the the bank involvement in cryptocurrency. So you wrote that in our view greater bank involvement raises risks to bank credit profiles outweighing the potential benefits from financial innovation and growth. Specifically, banks with concentrated exposure to crypto will face the challenges of managing higher price volatility. Absent legislative guard rails, regulatory standards, and stronger industry oversight, Fitch may negatively reassess bank business models and or risk profiles for banks that are active in the space. Can you elaborate on that? >> Yeah, that's key. So, um, what you are seeing is this administration is very pro- crypto and you saw that with the passage of the Genius Act. Uh so stable coins are something are starting to become a more mainstream um part of the financial system. And what we're trying to say is um with crypto, you know, you you needed some legislation to provide some legitimacy and some guard rails for um uh for state for crypto. And you're starting to see that. You're starting to see, you know, some of the regulatory developments. um one um taking down some of the prior restrictions on on involvement with crypto. Uh but you're starting to see some more, you know, the regulators step up and and provide some guidance as to how they're viewing it and you're starting to see more general, you know, industry um oversight. So, I think you start to see a more, you know, you start to see the the crypto industry grow up, if you will. Um so, we do expect um stable coins to be part of um to be a growing part of the financial system. Um, with that said, it does present strategic risk for banks. So, to the to the extent that stable coins, for example, become an alternative to bank deposits. Um, you know, can we, you know, can we see deposits leave the system uh in favor of stable coins? That's a strategic risk or strategic threat for the banking system as we see it. >> Concretely, Christopher, what are banks doing uh differently with crypto now that regulations are changing? Are we can consumers expect crypto offerings at you know JP Morgan or or Bank of America anytime soon? >> Yeah, I think the banks are I think banks are still um working on it trying and figuring out what the what their um angle is. You are seeing um you know some of the bigger banks uh you know pull together in terms of providing their own alternative you know stable coin. Um so you're seeing that with some of the bigger banks or some of the the bank um you know service providers. So I think all the banks are trying to figure out how do they um approach or attack uh the stable coin um space because it is it's here to stay. >> What can you expect as the first step towards crypto adoption from large banks? you're starting to see, you know, um some of the bigger banks provide custody services uh to to stable coin operators um and thinking through and you're starting to see more tokenization and that's probably where the real um the real benefit for some banks is really tokenizing um assets and deposits and I expect you know we'll see some more of that happening um and that can help with um increasing the velocity of cash and payments. So that's that's one area that we expect to see banks really push ahead on. >> What about consumer products? Like when can I expect to on-ramp from uh fiat to cryptos with my existing deposits at a bank? >> You're starting to see some of that already. I think JP Morgan has announced some plans to um some of the banks have announced some plans to um work with like a Coinbase or some of the some of the crypto exchanges to make that more um feasible. So you're starting to see that already uh happen. Have the changes in regulation allowed that fully right now? Like basically what is the holdup is my question. >> I don't think there's I don't think there's a regulatory hold up here. I think um I think some of the regulatory um restrictions have been lifted. So I think the banks are now stepping in and testing things and seeing what works and seeing what consumers are looking for. Well, you highlighted the major risks uh for uh this particular sector and you've noted prior failures like Teral Luna, Celsius, FTX as examples. What can traditional financial institutions, current banks learn from those examples such that if they were to adopt crypto fully in the near future, we don't have a repeat of that at large banks? Yeah, I I think you know the first thing is and it's one of these things that is true for a lot of things that you can say about banks is being overconentrated. So I think some of the banks that also were playing in crypto such as signature um you know they were probably a little bit overconentrated in crypto. So when crypto had a problem uh you know they they got caught out by it. So I think it's you know this is something for the bigger banks um where they can do it as a as a adjunct to to the other things that they're doing. So I think first and foremost not being overly concentrated in in the space I think is the is the probably the key uh for avoiding some of those risks because those risk those risks will exist. Um it's just not being overexposed to them. >> Have you done any analysis and do you have any thoughts on the emergence of Bitcoin treasury companies? I know those not technically banks, but a lot of institutional investors are now buying uh shares or proxies directly into those uh Bitcoin holding companies. Um and I I wonder how that may impact the banking sector if at all. It's it's probably we have not done any analysis specifically on that but it's something on our radar and we're looking at um there's you're seeing a lot of these fintexs apply for trust company uh charters which it appears um some of the regulatory regulators are more open to. So I think we're interested to see how that how that starts to blend you know fintech kind of um taking on some of the aspects of a bank uh via these trust uh charters. Um but I think it's too early to say just how meaningful that will be. >> Do you expect banks, US banks to adopt some of that role in the future, meaning provide holding instruments for crypto uh specifically Bitcoin? >> Um potentially. I think the the the thing there is just really the the the moneyaundering risks and I think that's where the banks will will need to tread carefully. >> Okay. uh any other major risks that the banking sector today faces? >> And it's probably more it's they're probably more indirect risks which is really just the fallout from tariffs um and what that means for the economy. So the banks are really just a a you know uh uh a reflection of the economy. So to the extent tariffs um start to you know eat into economic growth, they're going to feel it that way. Um and and I think the growth of private credit you know certainly bears watching and so as we we discussed earlier banks are lending very heavily into the private credit space. That's really where a lot of growth is. Um but it does that also present a strategic uh threat uh to the banking sector. >> Let's talk about uh profitability. Uh as you know the yield curve um by most measures 10 year minus two year for example has been steepening. What does that mean for the net profit margins of banks assuming this trend continues? >> We think it's going to be beneficial for banks. Um so you know they you know tend to borrow short lend long. So that's going to be I think a upward sloping yield curve should be um somewhat beneficial. We expect margins to continue to expand probably into next year irrespective of what you know the Fed you know will do on on short-term rates. So we think this is going to be largely beneficial um for the banking sector. So I think it should be a a boost to profitability. >> Okay. Yosua wrote a uh quick um commentary recently. US banks to face fewer operating profitability headwinds given recent policy revers reversals. A lot of that we've already covered. Um any other reversals to profitability headwinds that uh we may not have covered yet. I think no, but I think it's really on the consumer side, especially for the credit card lenders where um the CFPB had put up a lot of um you know, rules uh limits on on overdraft and late car uh late fees and a lot of those are not going to occur. So, I think those have been those will really help with profitability. Although, to be fair, they never actually were implemented, but banks were planning for for their implementation. uh but now that those have largely gone away, >> I am curious to get your thoughts on this particular chart by the St. Louis Fed. This is the delinquency rate on credit card loans uh from all commercial banks. As you can see, the the delinquency rate has peaked around uh Q4 of 2024 and it's stabilized above 3%. Um have you done any analysis on what this trend means and whether or not we can see any changes to this trend? you know, our uh we you know, we we do similar analyses and it's these are the same trends that we've been seeing in a lot of other in in in our data. You know, it's not surprising to us. We expected um uh losses and delinquencies and credit cards particularly to kind of peak around this time and then to level off. Um and if you just, you know, a lot of this is really just a function of uh unemployment. So, I think what happens to unemployment, that's really what's going to drive uh consumer delinquencies. So, can we make the statement that if tariffs worsen to the to the extent that layoffs become more imminent, we can expect delinquencies on credit cards to to go up? Therefore, uh banks will have to write off more loans. >> That's absolutely correct. >> Is that an imminent threat for you and your team? We don't think it's an imminent threat in the sense that we we don't expect that unemployment levels will soar to such levels that um losses and delinquencies will be outsized. So we do expect unemployment will tick up. That will certainly drive higher delinquencies and and losses in credit cards, but we don't think that's going to be a threat to the banks themselves. >> Okay. Um economists well some economists have highlighted the risks of uh tariffs on consumer price inflation especially on imported goods. Uh assuming those risks manifest do they have any direct impact on the health of the uh financial sector? indirectly. I think it's it's very much an indirect effect, meaning to the extent that um borrowers are, you know, are are getting further behind on payments, you'll see that show up in a lot of different ways. But again, we don't anticipate that becoming um so pronounced that it has a outsized effect on on bank performance. >> Okay. Uh can you comment on the new Basel 3 rules and how that's going to impact uh your ratings? >> Again, it's the Basel 3 rules, you know, they were proposed under the B administration. they've been um shelved and we're just waiting on uh what um the Fed and FDIC uh and OC are going to repropose. So if you Mickey Michelle Bowman who is now the vice chair of the of the Federal Reserve for supervision, she voted against the original proposal uh that came out. So I think it's in her court to see, you know, where this uh ultimately goes from here. Um but we expect a more what we would say capitaleneutral proposal meaning the last proposal would have probably implied an increase of 20% in capital levels. Um so based on some of the the the speeches that the governors have made I think any proposal would probably be more capital neutral meaning capital ratios probably wouldn't increase but they probably wouldn't decrease much. Generally speaking, have you noticed significant changes in the products offered at commercial banks given uh the uh changes in the administration post election? >> Noticed any changes um in product offerings as it relates to um you know kind of the change change administration? No. >> Investment banking attitudes any changes there? >> Um you're seeing I think there you know investment banking was expected to be a bright spot um following the uh uh the election. Um and then when with the tariff announcements and all the market volatility that ensued a lot of the investment banking um hopes you know were kind of put on pause we're starting to see that pick up now now that there's I think a little bit more clarity on where tariffs are headed where you have seen strength is on the trading side I mean all the volatility in the in the markets was actually beneficial uh especially for the large banks um they they really benefited um quite quite nicely from that and markets you know function very orderly despite the um the uh the the heightened volatility over that uh short span of time. >> Have there been any changes though in in terms of how banks are competing for deposits especially small versus large banks? >> No, I think um you know banks you know deposit competition remains remains intense. Um so I don't think there's anything new or different on the horizon u on that front. Um but you know I think that's been uh everyone has I think seen the value of of having some insured deposits on their balance sheet and not being um too reliant on on uninsured deposits. From a financial health and positioning standpoint, uh, which sector do you favor right now in terms of ratings? When it comes to ratings rather, small versus large, >> you know, I think the the large banks, especially the GIBs, are very well positioned from a rating um, standpoint. Um, and and they've been benefiting u quite nicely from their their franchises. I think for the when you get to the regional banks on down, there's, you know, they're they're in good shape. Uh but you're also there's also going to be a lot of um M&A that will take place and so I think that can complicate you know what the the financial picture uh for banks will look like. You're starting to see some big announcements come out. Um so I think we expect quite a bit more uh to occur. >> Okay. I'm curious to see your analysis analysis on this chart. This is the DXY the dollar index. It's been sliding all year uh for a variety of reasons, tariffs included and the trade war included. I wonder if this uh sliding of the dollar and weakening of the dollar is going to have any material impact on the financial positioning of banks that hold significant FX reserves. >> Not really. I think when you you know it's really more of a big bank issue and someone like a city which is very global in nature uh might see a little bit more noise in their financials as a result of you know currency movements. Um >> but I think when you get to kind of most of the regional banks on down it it really doesn't have an effect on them at all. >> Okay. So then looking ahead, any major developments, news items or political events that uh you're watching for that may change ratings for you? >> Nothing specific that um that uh you know will have a a a direct and immediate effect on ratings, but you know, watching the private credit space, watching what's happening on stable coins um and seeing where those go. Uh watching for, you know, where where you know more regulatory policy changes are are are expected. Those are probably the the things that we're watching the most and obviously the, you know, the the the economy in terms of, you know, rates and policy and and tariffs. Uh, but I think we're starting to see some certainty around um around that. So, I think it's really comes down to stable coins, private credit are probably the two more interesting things that could uh could have some impact. >> I want to get your reaction to this. Um, Professor Richard Werner was recently on the Tucker Carlson show and part of the segment touched on how banks create credit and money. Uh, to his point, um, and we can play a clip for the audience later, he says that credit is literally produced out of thin air. Um, I think he was talking about the money multiplier effect and how um, the fractional reserve banking system allows banks to create more money than the deposits actually made. So when I did the empirical test, the conclusion was the financial intermediation theory is rejected and the fraction reserve theory is rejected. Banks create money out of nothing. By the way, you can look it up. It's the most downloaded paper of all elce publications called and it's open access. So can banks individually create money out of nothing. >> Any bank, not just to be clear, not just central banks. >> Any bank. In fact, that's the whole point we're talking about normal banks. With central banks, it wouldn't be a surprise. >> But the bank of Omaha can >> Yes. Any bank creates money. When you take out a loan, the money that you're given as the borrower didn't previously exist. It is net new purchasing power that is being created and added to the money supply. And that's how the system works. Now, to understand how the system works is a precondition for having good economic analysis and good policy recommendations. And that explains for for for over 100 years macroeconomics has made no progress. They have no banks in there. They have no bank credit creation in there. you know when the 2008 crisis happened and the journalists I'm sure yourself also um you know want to ask some experts let's go to MIT professor of economics what's going on Lehman Brothers gone bust banks are going bust bank of America in trouble what's happening the honest answer of all the professors of economics would have been well I'm sorry I can't answer that question >> can you just comment on this further and uh just shed some light into how this may work I mean if banks create money out of thin air Why isn't everybody a millionaire already? >> Yeah, that's always a it's always a very good question. But, you know, that's what banks do. I mean, banks, you know, banks do create credit. Um, and they've been the the the primary creators of credit. So, I think what will be interesting is when you start getting into um these cryptocurrencies and and things that are called nar, you know, narrow banking uh and you're getting away from fractional reserve banking. That's going to be I think a real interesting things. as to how that develops, how or whether it develops. But you know the banks have been the engine of credit creation um for the dawn you know since banks you know have have existed and so they they they are a core function of the economy and to the extent that you you put something else in you know you try to replace them or there's some kind of substitute um that's where I think you know you need you really need to pay attention and and policy makers really need to understand um the implications of that. Do you think that uh the adoption or the further adoption of stable coins is going to significantly change the money supply, the M2 money supply in any way? >> I don't know that it'll change the M, you know, you know, the the M2 money supply in and of itself. >> Mhm. >> But it may change the form of that and it may change where it exists, you know. So, is it on a bank balance sheet or is it in some kind of fund uh controlled by some non-bank entity? Uh Scott Ascent, Treasury Secretary Scott Ascent has been very vocal about why it's important for the government to push towards the adoption of stable coins. I'm going to share with you this quote that was recently shared uh posted on the uh Department of Treasury website. Statement from the Secretary of Treasury dated July 18th. Secretary of the Treasury Scopus had issued the following statement following the signing of a genius act. Stable coins represent a revolution in digital finance. The dollar now has internet native payment rail that is fast, frictionless, and free of middlemen. This groundbreaking technology will buttress the dollar status as a global reserve currency, expand access to the dollar economy for billions across the globe, and lead to a surge in demand for US treasuries. Uh before we continue with any further, do you agree or disagree so far with this statement? >> Um I I think it still remains to be seen. So I think stable coins have that potential. I think the the um the impetus is to uh solidify the dollar as a reserve currency. So I think that's the the the thrust of why the Genius Act um uh you know behind the Genius Act. I think the question is does it ultimately you know serve that purpose. I don't think we know for sure um at this point. uh but you know there are some things that you know you could see coming out of this which is again faster payments especially crossber payments um you know faster velocity of cash um so that could make the dollar more attractive uh visav uh versus other currencies if that's the case so I think there's the potential exists I don't think we know the answer for sure >> well for the average person watching the show the average consumer who's not a banker or working the crypto space Why should we care about the adoption of stable coins? In other words, how would our lives change if more of the uh B2B or even BTOC payments are made via the blockchain? >> Well, it it does matter because in terms of uh how things, you know, what happens when things go wrong >> and that's the thing that we don't know. Um so, you know, again, take your bank, you have a loan. um let's say you need um some forgiveness or some kind of uh some help, the bank might be able to restructure your loan and do something for you on a blockchain or or in kind of like the you know those those things are harder to do u potentially or at least we haven't seen how those things would work um if that happens. So I think there's just a difference in terms of how the the mechanisms what happens when things go wrong who's responsible. So I think you don't you know there there isn't you know who's that responsible party? Who's that trusted um entity that will make sure things work. >> Okay. And final question before we go Christopher. So some skeptics of deregulation point out that uh this may undo years of tightening capital regulations from DoddFrank. This could push us closer to a 2008 scenario in the worst case uh scenario. uh you know walk us through the logic here. Is there a risk of everything being undone in the last 15 years? >> Yeah, I think that's the again that's the premise of what we're we're terming this pendulum swing which is you know you you the the regulatory sphere keeps going from tightening to loosening >> and you need they need to find a happy medium because regulations that are too tight are almost as bad as regulations that are too loose. Um so you want to create the right incentives. You want to give banks the the ability to conduct their business in an economical way. Um so if you make capital rules so high that they banks can't really uh serve their purpose that's not good. But if you make the capital rules too loose as you did as was happened you know in in in the leadup to the 2008 GFC then risk you know the banks become under capitalized for the risk that they're taking. So I think you know the problem that everyone you know that the regulators need to solve for is to find a a happy medium uh on that front because you know the extremes on either side are not good. >> So I know the road map remains to be seen but so far from what you've seen uh since the inauguration in January have we witnessed um dramatic changes to uh the risk profiles of banks such that we're on the road back to a 2008 scenario. >> We've not seen that. No. Um, so you're starting to see, I think, you know, some of the regulations, um, kind of go back to where things were, say, around 2020, >> you know, just, you know, prior to the Biden administration. So, you're seeing that, but we've not seen, I think, any um, a buildup of risk um, as a result of, you know, of the election. >> Great. Well, thank you very much, Christopher, for your uh, update. And, uh, where can we go to follow your work and, uh, Fitchratings work? >> www.fitchratings.com. Um, and uh, you can find our our research there. >> All right, we'll put the link down below. Thank you very much again. We'll speak again soon. Take care for now. >> All right, thank you. >> Thank you for watching. Don't forget to like and subscribe.
How Close Are Banks To Another 2008? Expert Reveals 'Pendulum Swing' | Christopher Wolfe
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to the extent that stable coins for example become an alternative to bank deposits um you know can we you know can we see deposits leave the system uh in favor of stable coins that's a strategic risk or strategic threat for the banking system >> some skeptics of deregulation point out that uh this may endue years of tightening capital regulations from DoddFrank this could push us closer to a 2008 scenario in the worst case uh scenario uh you Well, walk us through the logic here. Is there a risk of everything being undone in the last 15 years? There are some major key changes in the regulatory environment of the current administration when it comes to the banking sector. We'll examine how these regulatory changes are affecting ratings of banks, the health of the banking sector. We'll take a look at that and whether or not the bank sector faces any significant challenges or headwinds today in 2025. Christopher Wolf, managing director of banks at North America at Fitch Ratings, joins us once more. Welcome back to the show, Christopher. Good to see you again. >> Thank you, David. >> You're on the show in May 2024, so just over a year ago. Let's go over some of the key calls you made last year on my show. Importantly, you said that um the banking sector didn't face any imminent threats um last year. uh in a peer review of 13 banks only one was downgraded several with negative outlooks uh you had preferred uh larger banks over smaller banks last year uh you had correctly called for rates to stay long higher for longer uh which has played out correctly and you said that the key differences between last year and 2008 was that 2008 was more about reckless lending and weak underwriting and last year the key risks were high interest rates and post-pandemic adjustments. Mortgage lending was also stricter last year thanks to DoddFrank. And importantly, you were expecting last year for more regulations, not fewer regulations. So, let's just walk through the changes in the banking sector uh over the course of the last year and how your ratings have changed importantly after the election. >> Sure. So, our ratings have been fairly stable. Um and in fact, you're starting to see a little bit more positive development. So we actually have two banks on positive outlook reg and the regional sector uh both key and citizens financial. So I think that's a key change and I and the landscape for banking has really shifted um very dramatically from last year to this year uh post election. So, a lot it's been a a big change and I think um especially when you pick on you pick up on the regulatory uh front of things, you know, had we had a Harris administration, we probably would have assumed more regulation coming through. Um but what you're seeing with under the Trump 2.0 is a complete reversal of that. In fact, they're going after a lot of regulations. um taking down uh a lot of things that were put up during the uh the Biden administration. So that's been a sea change. Uh it's really been like a pendulum swing from one to the other. Um go ahead. >> Uh I was just going to ask uh can you please give us a few examples of some of the reversals of regulations that the Trump administration is currently engaged in? >> Sure. Um, you can start with crypto is probably the biggest one where under under the Biden administration, crypto was very much disfavored uh and under the under Trump 2.0, it's very much in favor and you saw that with the Genius Act that was just passed. You also see that with um consumer protection. So the CFPB uh has been I I think a a uh you know a political football and so under Biden a lot of regulations uh came up through the CFPB and the Trump administration has been methodically uh tearing those down. Uh you're also seeing that with credential regulations. So the capital rules um they had they were set to get a lot tighter under under uh the Biden administration and now you're seeing almost a a reversal of that. you know, you're you're seeing that with the supplementary leverage ratio for the big banks that's being relaxed. Uh so you're seeing that on a lot of different fronts. So consumer protection, crypto, um anti-money laundering compliance, you're seeing that with climate risk. Um again, the Biden administration very much turned up the the the volume on climate risk and the Trump administration is um reversing just about everything uh the Biden administration had done on that front as it relates to banks. So, >> okay, we'll touch on crypto and some of those other key points in just a minute in more detail. I want to read to you uh more or for the audience a paragraph that you wrote and well you and your team wrote in an article, a report rather published in late April called US banks regulatory pendulum in is in full swing and importantly uh you wrote that the aim of deregulation is to lower compliance costs, encourage innovation in the financial system and remove barriers to credit access. Fitch. Depending on the finalization and interaction of these efforts, Fitch may view them as broadly negative for bank credit profiles to the extent that they lead to lower capital buffers that are not commensurate with the bank's risk appetite for banks with less rating headroom. Sustained erosion of capital buffers could lead to pressure in ratings. What does that mean? Are you actually more negative on the outlook for ratings given these deregulatory efforts? Well, what we're trying to say there is banks have actually benefited from having good credential regulation. Now, to the extent that that is being reversed um and allowing for more risk-taking to uh occur um at the same time that capital you know the buffer for you know kind of you know for losses is is potentially um being diminished. That combination could lead to um a more negative view on our on capital. So again you know US banks and one of the reasons they weathered the you know they were able to withstand some of the pressures you know um during the pandemic was very strong capital bases and so you are seeing u banks increase their dividends capital and and share repurchases um so to the extent that they're bringing down their capital that could be a bit concerning. >> Well do these deregulation efforts uh change the capital reserve ratio requirements at all? >> Not at the moment. So you know if you think take take for example the supple supplementary leverage ratio >> right now just bringing that down for the most part it it hasn't been a binding constraint. So there's still you know banks are still subject to the riskbased rules. Um but what we we haven't seen yet is whether or not the riskbased rules will get relaxed or not. So that's going to be something we'll see um probably either later this year or early next year. So that's that gets to the Basel 3 endgame that uh the Biden administration had proposed and and died effectively. Um but we expect to see something come out of that um sometime either later this year or early next. So the answer is we don't know and I don't think the banks know for sure uh what the direction of of travel is for for bank regulatory capital. >> What does lower uh capital buffers mean for consumers and businesses? Are we expecting or can you expect more liquidity in the financial system from more lending because of these uh deregula uh deregulation efforts? Yeah, to the extent that that you do see some meaningful relaxation of capital standards, you it does free up banks to do more lending than they would have been otherwise. And so, and again, you're seeing a lot of lending um migrate to the um private capital space um through the non-bank financial sector. And that's something I think you know policy makers are keeping an eye on. And so banks are being in some ways um less able to to in uh to uh to lend and so lowering some of the capital requirements may allow or free up some capital for lending. >> Well, is there an appetite or demand for more loans from either businesses and or consumers right now given the current macro environment? >> It's interesting. It's an interesting question because when you look at the uh the loan growth numbers um you're not seeing a lot in kind of just the uh traditional kind of consumer and commercial you know categories where you are seeing a lot of lending growth is lending to the non-bank sector. So banks lending to non-banks that has been growing very dramatically um and and it's really um you know feed you know fueling the growth in the in the private capital space private credit. Okay. Interesting. Last year we had talked about the risk that commercial real estate posed to banks specifically smaller regional banks uh many of whom have had exposure or higher exposure to CRA. I think up to 20 to 30% of the loan books uh tied to CRA and that sector posed a risk given the uh hybridization of work at home and or at the office. Uh how would you assess CRA risk uh C space right now in 2025? Yeah, I think the CRA risk has has is really starting to diminish and it's really starting to be, you know, looking, you know, become more of a rear view uh issue for for the banking sector. So, um you're starting to see some, I think, probably some bottoming out um at least in the bank CR portfolios, the the problems have already been identified. They've largely been reserved. you still might see some losses full come through. So, we're not calling a, you know, an end to the CR cycle, but what you're starting to see is valuations either um bottom out or start to firm up. You're starting to see change in the hybrid work um arrangement. So, you're seeing more companies uh require in office attendance more frequently. >> Um and so, you're starting to see some I think some positive improvement there. and and I I think CRA is becoming much less of an issue uh for the banking sector going forward. >> Okay. I know that uh you and your team haven't made explicit rate outlook projections. Uh but can you maybe comment on maybe stress tests that you've done on whether or not the banking sector faces more or less risk if let's say the uh Fed funds rate stays unchanged for the rest of the year versus a few rate cuts. Um what does that look like for banks? >> Yeah, so right now Fischer is forecasting just one rate cut. um in in the fourth quarter of of this year. So, and we do expect some further rate cuts in 2026. So, the direction of travel is likely to see some some uh uh rate cuts. Uh that's going to be on the short-term side. It really comes down to what happens on the long end of the curve. So, uh just because the Fed cuts short-term rates doesn't mean long-term rates will come down as well. So, the slip the slope of the yield curve will matter for banks um going forward and we'll see where the Fed policy ends up. I I think markets have been expecting some rate cuts. Um but we'll see when and you know when they happen but we you know we do think the banks will be um well positioned to manage um a down rate trajectory. Uh particularly if it's measured. So 20 you know if it's a 25 basis point cut here or there that that should be easily um manageable for the banking sector. We don't see that as being a stress factor. >> Okay. I want to touch on cryptocurrencies. Uh now as you said one of the major changes in this administration's um regulatory profile versus the last is changes to the uh the the bank involvement in cryptocurrency. So you wrote that in our view greater bank involvement raises risks to bank credit profiles outweighing the potential benefits from financial innovation and growth. Specifically, banks with concentrated exposure to crypto will face the challenges of managing higher price volatility. Absent legislative guard rails, regulatory standards, and stronger industry oversight, Fitch may negatively reassess bank business models and or risk profiles for banks that are active in the space. Can you elaborate on that? >> Yeah, that's key. So, um, what you are seeing is this administration is very pro- crypto and you saw that with the passage of the Genius Act. Uh so stable coins are something are starting to become a more mainstream um part of the financial system. And what we're trying to say is um with crypto, you know, you you needed some legislation to provide some legitimacy and some guard rails for um uh for state for crypto. And you're starting to see that. You're starting to see, you know, some of the regulatory developments. um one um taking down some of the prior restrictions on on involvement with crypto. Uh but you're starting to see some more, you know, the regulators step up and and provide some guidance as to how they're viewing it and you're starting to see more general, you know, industry um oversight. So, I think you start to see a more, you know, you start to see the the crypto industry grow up, if you will. Um so, we do expect um stable coins to be part of um to be a growing part of the financial system. Um, with that said, it does present strategic risk for banks. So, to the to the extent that stable coins, for example, become an alternative to bank deposits. Um, you know, can we, you know, can we see deposits leave the system uh in favor of stable coins? That's a strategic risk or strategic threat for the banking system as we see it. >> Concretely, Christopher, what are banks doing uh differently with crypto now that regulations are changing? Are we can consumers expect crypto offerings at you know JP Morgan or or Bank of America anytime soon? >> Yeah, I think the banks are I think banks are still um working on it trying and figuring out what the what their um angle is. You are seeing um you know some of the bigger banks uh you know pull together in terms of providing their own alternative you know stable coin. Um so you're seeing that with some of the bigger banks or some of the the bank um you know service providers. So I think all the banks are trying to figure out how do they um approach or attack uh the stable coin um space because it is it's here to stay. >> What can you expect as the first step towards crypto adoption from large banks? you're starting to see, you know, um some of the bigger banks provide custody services uh to to stable coin operators um and thinking through and you're starting to see more tokenization and that's probably where the real um the real benefit for some banks is really tokenizing um assets and deposits and I expect you know we'll see some more of that happening um and that can help with um increasing the velocity of cash and payments. So that's that's one area that we expect to see banks really push ahead on. >> What about consumer products? Like when can I expect to on-ramp from uh fiat to cryptos with my existing deposits at a bank? >> You're starting to see some of that already. I think JP Morgan has announced some plans to um some of the banks have announced some plans to um work with like a Coinbase or some of the some of the crypto exchanges to make that more um feasible. So you're starting to see that already uh happen. Have the changes in regulation allowed that fully right now? Like basically what is the holdup is my question. >> I don't think there's I don't think there's a regulatory hold up here. I think um I think some of the regulatory um restrictions have been lifted. So I think the banks are now stepping in and testing things and seeing what works and seeing what consumers are looking for. Well, you highlighted the major risks uh for uh this particular sector and you've noted prior failures like Teral Luna, Celsius, FTX as examples. What can traditional financial institutions, current banks learn from those examples such that if they were to adopt crypto fully in the near future, we don't have a repeat of that at large banks? Yeah, I I think you know the first thing is and it's one of these things that is true for a lot of things that you can say about banks is being overconentrated. So I think some of the banks that also were playing in crypto such as signature um you know they were probably a little bit overconentrated in crypto. So when crypto had a problem uh you know they they got caught out by it. So I think it's you know this is something for the bigger banks um where they can do it as a as a adjunct to to the other things that they're doing. So I think first and foremost not being overly concentrated in in the space I think is the is the probably the key uh for avoiding some of those risks because those risk those risks will exist. Um it's just not being overexposed to them. >> Have you done any analysis and do you have any thoughts on the emergence of Bitcoin treasury companies? I know those not technically banks, but a lot of institutional investors are now buying uh shares or proxies directly into those uh Bitcoin holding companies. Um and I I wonder how that may impact the banking sector if at all. It's it's probably we have not done any analysis specifically on that but it's something on our radar and we're looking at um there's you're seeing a lot of these fintexs apply for trust company uh charters which it appears um some of the regulatory regulators are more open to. So I think we're interested to see how that how that starts to blend you know fintech kind of um taking on some of the aspects of a bank uh via these trust uh charters. Um but I think it's too early to say just how meaningful that will be. >> Do you expect banks, US banks to adopt some of that role in the future, meaning provide holding instruments for crypto uh specifically Bitcoin? >> Um potentially. I think the the the thing there is just really the the the moneyaundering risks and I think that's where the banks will will need to tread carefully. >> Okay. uh any other major risks that the banking sector today faces? >> And it's probably more it's they're probably more indirect risks which is really just the fallout from tariffs um and what that means for the economy. So the banks are really just a a you know uh uh a reflection of the economy. So to the extent tariffs um start to you know eat into economic growth, they're going to feel it that way. Um and and I think the growth of private credit you know certainly bears watching and so as we we discussed earlier banks are lending very heavily into the private credit space. That's really where a lot of growth is. Um but it does that also present a strategic uh threat uh to the banking sector. >> Let's talk about uh profitability. Uh as you know the yield curve um by most measures 10 year minus two year for example has been steepening. What does that mean for the net profit margins of banks assuming this trend continues? >> We think it's going to be beneficial for banks. Um so you know they you know tend to borrow short lend long. So that's going to be I think a upward sloping yield curve should be um somewhat beneficial. We expect margins to continue to expand probably into next year irrespective of what you know the Fed you know will do on on short-term rates. So we think this is going to be largely beneficial um for the banking sector. So I think it should be a a boost to profitability. >> Okay. Yosua wrote a uh quick um commentary recently. US banks to face fewer operating profitability headwinds given recent policy revers reversals. A lot of that we've already covered. Um any other reversals to profitability headwinds that uh we may not have covered yet. I think no, but I think it's really on the consumer side, especially for the credit card lenders where um the CFPB had put up a lot of um you know, rules uh limits on on overdraft and late car uh late fees and a lot of those are not going to occur. So, I think those have been those will really help with profitability. Although, to be fair, they never actually were implemented, but banks were planning for for their implementation. uh but now that those have largely gone away, >> I am curious to get your thoughts on this particular chart by the St. Louis Fed. This is the delinquency rate on credit card loans uh from all commercial banks. As you can see, the the delinquency rate has peaked around uh Q4 of 2024 and it's stabilized above 3%. Um have you done any analysis on what this trend means and whether or not we can see any changes to this trend? you know, our uh we you know, we we do similar analyses and it's these are the same trends that we've been seeing in a lot of other in in in our data. You know, it's not surprising to us. We expected um uh losses and delinquencies and credit cards particularly to kind of peak around this time and then to level off. Um and if you just, you know, a lot of this is really just a function of uh unemployment. So, I think what happens to unemployment, that's really what's going to drive uh consumer delinquencies. So, can we make the statement that if tariffs worsen to the to the extent that layoffs become more imminent, we can expect delinquencies on credit cards to to go up? Therefore, uh banks will have to write off more loans. >> That's absolutely correct. >> Is that an imminent threat for you and your team? We don't think it's an imminent threat in the sense that we we don't expect that unemployment levels will soar to such levels that um losses and delinquencies will be outsized. So we do expect unemployment will tick up. That will certainly drive higher delinquencies and and losses in credit cards, but we don't think that's going to be a threat to the banks themselves. >> Okay. Um economists well some economists have highlighted the risks of uh tariffs on consumer price inflation especially on imported goods. Uh assuming those risks manifest do they have any direct impact on the health of the uh financial sector? indirectly. I think it's it's very much an indirect effect, meaning to the extent that um borrowers are, you know, are are getting further behind on payments, you'll see that show up in a lot of different ways. But again, we don't anticipate that becoming um so pronounced that it has a outsized effect on on bank performance. >> Okay. Uh can you comment on the new Basel 3 rules and how that's going to impact uh your ratings? >> Again, it's the Basel 3 rules, you know, they were proposed under the B administration. they've been um shelved and we're just waiting on uh what um the Fed and FDIC uh and OC are going to repropose. So if you Mickey Michelle Bowman who is now the vice chair of the of the Federal Reserve for supervision, she voted against the original proposal uh that came out. So I think it's in her court to see, you know, where this uh ultimately goes from here. Um but we expect a more what we would say capitaleneutral proposal meaning the last proposal would have probably implied an increase of 20% in capital levels. Um so based on some of the the the speeches that the governors have made I think any proposal would probably be more capital neutral meaning capital ratios probably wouldn't increase but they probably wouldn't decrease much. Generally speaking, have you noticed significant changes in the products offered at commercial banks given uh the uh changes in the administration post election? >> Noticed any changes um in product offerings as it relates to um you know kind of the change change administration? No. >> Investment banking attitudes any changes there? >> Um you're seeing I think there you know investment banking was expected to be a bright spot um following the uh uh the election. Um and then when with the tariff announcements and all the market volatility that ensued a lot of the investment banking um hopes you know were kind of put on pause we're starting to see that pick up now now that there's I think a little bit more clarity on where tariffs are headed where you have seen strength is on the trading side I mean all the volatility in the in the markets was actually beneficial uh especially for the large banks um they they really benefited um quite quite nicely from that and markets you know function very orderly despite the um the uh the the heightened volatility over that uh short span of time. >> Have there been any changes though in in terms of how banks are competing for deposits especially small versus large banks? >> No, I think um you know banks you know deposit competition remains remains intense. Um so I don't think there's anything new or different on the horizon u on that front. Um but you know I think that's been uh everyone has I think seen the value of of having some insured deposits on their balance sheet and not being um too reliant on on uninsured deposits. From a financial health and positioning standpoint, uh, which sector do you favor right now in terms of ratings? When it comes to ratings rather, small versus large, >> you know, I think the the large banks, especially the GIBs, are very well positioned from a rating um, standpoint. Um, and and they've been benefiting u quite nicely from their their franchises. I think for the when you get to the regional banks on down, there's, you know, they're they're in good shape. Uh but you're also there's also going to be a lot of um M&A that will take place and so I think that can complicate you know what the the financial picture uh for banks will look like. You're starting to see some big announcements come out. Um so I think we expect quite a bit more uh to occur. >> Okay. I'm curious to see your analysis analysis on this chart. This is the DXY the dollar index. It's been sliding all year uh for a variety of reasons, tariffs included and the trade war included. I wonder if this uh sliding of the dollar and weakening of the dollar is going to have any material impact on the financial positioning of banks that hold significant FX reserves. >> Not really. I think when you you know it's really more of a big bank issue and someone like a city which is very global in nature uh might see a little bit more noise in their financials as a result of you know currency movements. Um >> but I think when you get to kind of most of the regional banks on down it it really doesn't have an effect on them at all. >> Okay. So then looking ahead, any major developments, news items or political events that uh you're watching for that may change ratings for you? >> Nothing specific that um that uh you know will have a a a direct and immediate effect on ratings, but you know, watching the private credit space, watching what's happening on stable coins um and seeing where those go. Uh watching for, you know, where where you know more regulatory policy changes are are are expected. Those are probably the the things that we're watching the most and obviously the, you know, the the the economy in terms of, you know, rates and policy and and tariffs. Uh, but I think we're starting to see some certainty around um around that. So, I think it's really comes down to stable coins, private credit are probably the two more interesting things that could uh could have some impact. >> I want to get your reaction to this. Um, Professor Richard Werner was recently on the Tucker Carlson show and part of the segment touched on how banks create credit and money. Uh, to his point, um, and we can play a clip for the audience later, he says that credit is literally produced out of thin air. Um, I think he was talking about the money multiplier effect and how um, the fractional reserve banking system allows banks to create more money than the deposits actually made. So when I did the empirical test, the conclusion was the financial intermediation theory is rejected and the fraction reserve theory is rejected. Banks create money out of nothing. By the way, you can look it up. It's the most downloaded paper of all elce publications called and it's open access. So can banks individually create money out of nothing. >> Any bank, not just to be clear, not just central banks. >> Any bank. In fact, that's the whole point we're talking about normal banks. With central banks, it wouldn't be a surprise. >> But the bank of Omaha can >> Yes. Any bank creates money. When you take out a loan, the money that you're given as the borrower didn't previously exist. It is net new purchasing power that is being created and added to the money supply. And that's how the system works. Now, to understand how the system works is a precondition for having good economic analysis and good policy recommendations. And that explains for for for over 100 years macroeconomics has made no progress. They have no banks in there. They have no bank credit creation in there. you know when the 2008 crisis happened and the journalists I'm sure yourself also um you know want to ask some experts let's go to MIT professor of economics what's going on Lehman Brothers gone bust banks are going bust bank of America in trouble what's happening the honest answer of all the professors of economics would have been well I'm sorry I can't answer that question >> can you just comment on this further and uh just shed some light into how this may work I mean if banks create money out of thin air Why isn't everybody a millionaire already? >> Yeah, that's always a it's always a very good question. But, you know, that's what banks do. I mean, banks, you know, banks do create credit. Um, and they've been the the the primary creators of credit. So, I think what will be interesting is when you start getting into um these cryptocurrencies and and things that are called nar, you know, narrow banking uh and you're getting away from fractional reserve banking. That's going to be I think a real interesting things. as to how that develops, how or whether it develops. But you know the banks have been the engine of credit creation um for the dawn you know since banks you know have have existed and so they they they are a core function of the economy and to the extent that you you put something else in you know you try to replace them or there's some kind of substitute um that's where I think you know you need you really need to pay attention and and policy makers really need to understand um the implications of that. Do you think that uh the adoption or the further adoption of stable coins is going to significantly change the money supply, the M2 money supply in any way? >> I don't know that it'll change the M, you know, you know, the the M2 money supply in and of itself. >> Mhm. >> But it may change the form of that and it may change where it exists, you know. So, is it on a bank balance sheet or is it in some kind of fund uh controlled by some non-bank entity? Uh Scott Ascent, Treasury Secretary Scott Ascent has been very vocal about why it's important for the government to push towards the adoption of stable coins. I'm going to share with you this quote that was recently shared uh posted on the uh Department of Treasury website. Statement from the Secretary of Treasury dated July 18th. Secretary of the Treasury Scopus had issued the following statement following the signing of a genius act. Stable coins represent a revolution in digital finance. The dollar now has internet native payment rail that is fast, frictionless, and free of middlemen. This groundbreaking technology will buttress the dollar status as a global reserve currency, expand access to the dollar economy for billions across the globe, and lead to a surge in demand for US treasuries. Uh before we continue with any further, do you agree or disagree so far with this statement? >> Um I I think it still remains to be seen. So I think stable coins have that potential. I think the the um the impetus is to uh solidify the dollar as a reserve currency. So I think that's the the the thrust of why the Genius Act um uh you know behind the Genius Act. I think the question is does it ultimately you know serve that purpose. I don't think we know for sure um at this point. uh but you know there are some things that you know you could see coming out of this which is again faster payments especially crossber payments um you know faster velocity of cash um so that could make the dollar more attractive uh visav uh versus other currencies if that's the case so I think there's the potential exists I don't think we know the answer for sure >> well for the average person watching the show the average consumer who's not a banker or working the crypto space Why should we care about the adoption of stable coins? In other words, how would our lives change if more of the uh B2B or even BTOC payments are made via the blockchain? >> Well, it it does matter because in terms of uh how things, you know, what happens when things go wrong >> and that's the thing that we don't know. Um so, you know, again, take your bank, you have a loan. um let's say you need um some forgiveness or some kind of uh some help, the bank might be able to restructure your loan and do something for you on a blockchain or or in kind of like the you know those those things are harder to do u potentially or at least we haven't seen how those things would work um if that happens. So I think there's just a difference in terms of how the the mechanisms what happens when things go wrong who's responsible. So I think you don't you know there there isn't you know who's that responsible party? Who's that trusted um entity that will make sure things work. >> Okay. And final question before we go Christopher. So some skeptics of deregulation point out that uh this may undo years of tightening capital regulations from DoddFrank. This could push us closer to a 2008 scenario in the worst case uh scenario. uh you know walk us through the logic here. Is there a risk of everything being undone in the last 15 years? >> Yeah, I think that's the again that's the premise of what we're we're terming this pendulum swing which is you know you you the the regulatory sphere keeps going from tightening to loosening >> and you need they need to find a happy medium because regulations that are too tight are almost as bad as regulations that are too loose. Um so you want to create the right incentives. You want to give banks the the ability to conduct their business in an economical way. Um so if you make capital rules so high that they banks can't really uh serve their purpose that's not good. But if you make the capital rules too loose as you did as was happened you know in in in the leadup to the 2008 GFC then risk you know the banks become under capitalized for the risk that they're taking. So I think you know the problem that everyone you know that the regulators need to solve for is to find a a happy medium uh on that front because you know the extremes on either side are not good. >> So I know the road map remains to be seen but so far from what you've seen uh since the inauguration in January have we witnessed um dramatic changes to uh the risk profiles of banks such that we're on the road back to a 2008 scenario. >> We've not seen that. No. Um, so you're starting to see, I think, you know, some of the regulations, um, kind of go back to where things were, say, around 2020, >> you know, just, you know, prior to the Biden administration. So, you're seeing that, but we've not seen, I think, any um, a buildup of risk um, as a result of, you know, of the election. >> Great. Well, thank you very much, Christopher, for your uh, update. And, uh, where can we go to follow your work and, uh, Fitchratings work? >> www.fitchratings.com. Um, and uh, you can find our our research there. >> All right, we'll put the link down below. Thank you very much again. We'll speak again soon. Take care for now. >> All right, thank you. >> Thank you for watching. Don't forget to like and subscribe.