Surveillance: CS CEO Koerner Urges Patience

the Bloomberg Terminal and the Bloomberg Business App. We can now head over to London to catch up with France, Saint Laqua and the kratiswee Thank you so much, John. We are delighted to be joined by of course Aldrich Corner of the the Kurti Sweet, chief executive officer. Thank you for joining us. It's a difficult day, another difficult day for Krati Sweeze. What can you tell us about the outflows in the wake of SEB so as we be As you know, it's a very recent saying which happened

up a weekend and yesterday. So far it's pretty calm even so material good influence yesterday still Also, you know, I had a client meeting which was very positive on their one. So so far it's kind but I think it's early days to look at the calm. Are you suggesting that you could also actually get inflows. We got them yesterday, which is a positive sign, I would say, and you know, for us, and that is maybe a little bit if I may say so, unseeing in comparison

to SVB. It's a very different situation. You know, we are GCIP as you know, we are following materially different and higher standards when it comes to capital funding, liquidity and so on. And that's why we said, you know, we gave I think this situation is important. We gave r capital ratio of like one hundred and forty forty at the at the end of Q four, which is strong ratio, which has improved as we went through this quarter to like hundred and fifty on average and spot

being even high on that. But so outflows have not reversed, but they've actually lowered. Are they reversing? Look, they have significantly moderated, as I put it. We gave an update on February nine in terms of where we are on the passts and addu ascess and so on. We will give next update with the first quarter result. But this is also very clear. You know, if and we talked about that. What has happened in like Furce quarter. You know, we are fully focused on it, turn it around, but

that takes longer than like just two months. But then you do you have this material weakness today? What happened there? There's concerned that actually almost every day there's some kind of bad news and you have your share price at a record low like that can't be a comfortable position, no, But we published our report today as we have seen the financial result. I think that's a key message. The financial result is unchanged for twenty twenty two and previous years.

We delayed the reporters you have seen a couple of days to appropriately deal with you know, questions the SEC had and we did, and that is part of an longer ongoing dialogue. And we acknowledge that we have a material weakness in the financial in the financial reporting control, which we are addressing and immediating forcefully. How are you addressing that? So? Is that an auditor problem had PwC on the case? Is it their fault? No, it's absolutely

not their fault. That is obviously you know that cause higher hand in hand as you work together with your auditor, but it's a collective fining and we are addressing it. We have remediation planner. We are addressing it. So you have an anchor investor that put one point five million in the bank, Now their share value has gone down by one third. Will they have to inject more? What

kind of conversations are you having with them? Well, look, nobody's pleased devolve the SHAPERCE development, you know, but we match what we can match. And this is the execution of our plan. That's a white strategy. This is a white plan. We are executing at pace and even ahead of the plan. And I think I'll sharel to see that as well. That's an unpleasant situation. Chap Price or Dotcom match CHAPERCE. I can match the execution and I do.

So you don't think you're getting pressure from shareholders. You're not getting pressure from you know, certain big shareholders to do more and actually to have all options on the table now. As I said, they are obviously they're obviously

not pleased with the development. I'm not please developed the first hand, obviously, but you know, we are executing and once we are executing step by step, and we show the market and this is exactly why we said it's a three years process and we are executing and that is you know, the market will acknowledge that and the share process will follow. Do you think all options should be on the table? What about breaking up the bank? If you look and I know understand your frustration with

the share price and saying, look, you're just executing. But when you look at the share price ninety seven percent below that two thousand and seven high, like how do you regain from that now? But that you can can't compare as you know, but you know, as I said, it's a right Swagi and fully fully convinced off the Swagi. We are executing at past. We have the right team and you know that's why we said in October it

needs radical change. You know, the bank needs to be changed, and we said it's a three years transformation and you can't come after two months and Salo, why is not everything done? But radical change could be splitting off the bank. Is it something that you're you're valuing? Oh? Look, the new Creates visa is focused on the course lengths of the bank. This is welds management. The swis spend persons

asset management. What we put the market either trading and sales business that makes entirely sense, entirely different risk profile, will be very profitable and we reward shareholders. And I think the sheilds understand it. When will you be able to say, like the worst is really behind us? But

we said it's three years transformation. We said we are going to make a loss unfortunately this year because you know, and this is something which you need to understand, a lot of the restructuring courts, you know, baked into the transformation are coming in twenty twenty three before we see a lot of benefits out of that transformation, and that is something which happens. That's why we said it takes three years. Three years is a long time work. I mean a lot of but a lot of the shareholders

will start asking questions. I mean, have you asked them for more money to make it faster for three years, especially in this banking world than anything could happen? No, But you know, as I said, our LCR ratio is strong and very strong, has has getting stronger as we speak. Our capital ratio is very strong at fourteen point one and as we gave it to Q four, so we have everything we need to go through the transformation. Mars or are you expecting, you know, the first quarter to

be good enough to keep shareholders off your back. The first quarter is, as we said, and we put it very clearly, we will make a loss in the first quarter, but you will see progress in the first quarter numbers. It's not in terms of what outflows in certain business momentum. We're specifically businessman and the market business for example, which was as we all discussed for the for four reasons, clearly understandable reasons. A week in the Q four looks better.

We else management, we are making progress, certainly not yet there where we should be, but we are making progress. Are you comfortable with the banking system as a whole. I mean, we've we've lived through a pretty incredible couple of days and if you look at the markets are all over the place. No, I think so. I mean this is somewhat an isolated problem. If you want tool and as I said, you know, if you are guzip it or if you look at the large banks, I see we will manage to it. Talk to me a

little bit about Cratty sweet first, Boston. So, first of all, what's the timeline for the IPO. The timeline Fancy is unchanged, a discussed last time. So we have a very clear plan to put it into market creating liquidity event most likely in IPO. We are working against our internal plans forcefully, and I would expect such an event in like twenty twenty five. As I said earlier, Okay, any news, I mean today you had news about the twenty percent that

would go to craze Piece first Boston Partners. What happens to the rest? The rest is owned by us and obviously also portioned by Michael as as as we announce it in like February, the rest is own past So this is this is our part of the bank, remains our part of the bank. We are going into liquidity and again most likely IPO you will be probably a majority shold and then we make decision you know how

our holding develops over the next following years. So you're still looking for an anchor investor for Crazpiece first, Are you closer to finding well, I don't know. Yeah, we are close to, but I'm not sure if it's anchor. And so we have a lot of interest from SERTA parties to be invested into that. It tells you something about the Surgia. I would say and we are evaluating that Middle Eastern investors, different kinds of investors, different parts

of the world, but large chunk investors decision. And I will inform you first as Okay, how far away are we from that? We are pretty close. I would say a couple of weeks will come before the first quarter. I will tell the market if we are there. What do you find most difficult about Your job is to make it understandable. I would say, you know that we are absolutely doing the right things that we need some

time to get through. And and this is what all my colleagues and I try to do, you know, to regain the trust off the bank over the next couple of months. But is it more important to regain the trust of shareholders or or clients? It is look clients, is I told you last time? I would say one of the best experience, even in this very difficult months

last year. I mean, they are so supportive of us, they are listening to us, they're doing active things to support they like to bank with create switch is a fantastic experience. But you know, the convincing of this is the right thing to do. We are executing at pace and the head of plan is with all different stakeholders, all different ones, But why are they taking money out?

Then if your clients are happy, because and that's what I also said, if you are in a situation like we were in October, you know where you had malicious information out in the market. At the beginning of October, we were not able to speak, legally not able to speak. And that's why I said, like two thirds of the outflaw stemming from October alone, eighty five percent from October and November. And the moment we could reach out, we

started that huge program talk to our clients. More than ten thousand clients in wealth managements since then, more than fifty thousand individual meetings in Switzerland, and that has created momentum. Are you frustrated though that the actually you haven't been able to get ahead of that quicker? No, I think we are really doing the utmost possible and I'm proud, not frustrated. I'm proud of what my colleagues, my people at the front units have done since months. I'm really

proud of. But the message today, I mean, if you look at your share price, you're proud. You think you're executing You're on a three year ap plan, if you look at the share price at a record low, does your stomach sink a little bit when you look at the share price? Nothing, which I like obviously, But look, I can't control what I can control. I don't control a share price. I control the execution of the right strategy, and you think the share price will will catch up

if you execute? All right, thank you so much for your time, But it was all recruiter. They're the Credit Swiss chief executive officer and with that, I'm going to send it back to you, a friend, saint, just absolutely fantastic. And now we're going to take a different perspective here

Magnus Billing joining. He's the chief executive officer of Sweden's elector, and we're thrilled he could join us this morning here with perspective on the American banks and with the perspective on the pension responsibilities in his Sweden, across Europe and frankly at worldwide. Magnus, the path is this October of last year, a small matter of a busted shure thing in the United Kingdom, a ballot by the Bank of England,

literally in hours. What we've all observed over the last four days and we look at Sweden as the bastion. What are the shadows within the Swedish pension system right now? Is it pricing commercial real estate is a different nuances of European banking. What are the shadows you confront this morning? Well, good morning, thank you for having me. I think first of all that the Swedish pension system it's very robot it's small, the robust that it's been in the last

ten fifteen years. But having said at obviously end of the day, it's a lot about liquidity when the psychology kicks in the dugle market space, and I think the issue that you brought up about the UK event that took place last year and also what we see now in the past week or so, it's a lot of liquidity psycholity around liquidity and the easiness one can move capital today with the digital development that we've seen in

the past number of years. But looking at just a balance sheet of basically across all the pension funds in Sweden and an order gredion, they are very robust today. Do you bring the money home? My experience on the geography of crisis is one endowed pollet home to Swedish pension plans and would you guess European continental plans do

they just bring the assets home. I think the under the lying fundamentals of the US market is still very attractive for any investors, so I think in the mid to long term US will always be able to attract the investors to invest into the market space. That goes also for the pension funds, and I think looking at the size of many of the pension funds in the Nordics and the European space, they need to diversify into

the US market and under regions around the globe. So I think I have at least a positive mid to long term view on the US markets capacity to deliver shareholder value to us. The magnets. You have a problem this morning, as most people know, so let's talk about that problem. Now. How does the Swedish pension fund end up allocated to Signature Bank First republic An SVP. Yeah, I mean we've been we invested in those companies starting twenty seventeen up until twenty nineteen, and we've been growing

that allocation over the years. So obviously we thought that the initial year was good for US investing that, but with what's happened last week. Obviously we think it's a big failure for us as an investor, and we need to learn something from that and take actions based upon the lessons learned. So it's a failure. I just want to sort of put that in proportion to the total portfolio that we're managing. We're talking about one percent of

a total capital that we manage. So from a customer point of view, this does not have a material impact at all. It will not impact the pensions that we are committing to our customers. I understand that, but it just speaks a weak internal controls and some odd decisions that we need to talk about. Magnus, the fact that you were allocated to those names, but some of the conservative Swedish lenders you ended up selling those positions in twenty twenty two. So I guess the question that will

be repeatedly asked of you is just what happened? What happened and why did you buy more of those names and sound more conservative names. Well, those are two separate issues. The divestment of the Swedish banks is a standalone assessment and the decision made made at a different time. Talking about the US banks, what we liked about then was the market position, the position when it comes to transformation in the digital space and the US market generally speaking,

the depth of that and the size of it. We had discussion with the Silicon Valley Bank during the fall because we also saw as many others, you know, the withdrawal of the post sits and the investments the company did in the long term government securities and what that led when it comes to durational liquidity aspects. We thought that the action plan that the company had was they were transparent about that, and we thought it was well

fought through. Then last week the company acted not in accordance with the action plan we had discussed and talked with them about, and that we had been presentative, and that surprised us, and I think that was a big mistake from the company's side. Well, clearly, mcnus. It didn't just surprise you, It surprised many people, including the regulator here in the United States. So a lot of people

have questions they'll need to answer as well. I want to understand how you responded to that in the last couple of days. So you've identified some banks that you hold that haven't managed their interest rate risk properly. Are you worried that you also hold some European banking names that maybe you're in the same position, perhaps even worse. Given what's happened with the bond market there over the last couple of years. We see in the European market

as well withdraw all of deposits and it's increasing. So we're monitoring that very closely, and we're monitoring basically the whole exposure we have to the banking sector, which is in total two percent of the total portfolio. So I think we need the last few days has been you know, escalating a little bit in the European market, but we're

monitoring that. I think the loss to equity ratio is completely different or very different in the European space compared to some of the banks in the US market that you mentioned earlier. Magis, Can we just focus on Europe just a little bit more. Do you hold credit suites? No, we don't have you sold any names in the last twenty four rounds the last four yeer hours. If you de risk around the European banks at all in any way, shape or form, we have not. We have we hold

shares in two Nordic banks SCB and Nordia. You also, though, have taken on these credit risk transfers over the past few years, or basically you take on the risk associated with particularly European bank books tied to commercial loans to stress that how confident are you that those are going to be solid investments. I think the banking sector in Europe is stronger than whether we're in prior to the global financial crisis, so I think we're in a better

starting position. Obviously, a lot of things are happening around now, and it's clearly a transition face that the market is going through with the enormous increase in the interest rate that we've seen in the past twelve months and the speed of that, and we haven't transitioned through that yet. But I think the banks, the Nordic banks that we hold chairs are in a solid position as of today.

Given the bet that you made on some of the US banks, I'm wondering how you're handling the fallout, whether you're getting out of the positions, whether you're doubling down, whether you're buying more. What's been sort of the positioning over the past couple of days. Well, when you talk about the silicon value Bank and the signature bank being in a receivership. I think it's more a legal issue for us to ensure that we protect our legal rights there.

I don't expect any value to come out with that ass of today when it comes to First Republic. Obviously, it's very volatile and it's day to day. Basically, yesterday it fell a lot, today it's up again. Well, we haven't taken any decision yet, but we are ready to take decisions as we see appropriate for us at any stage. But we haven't taken a major actions today which brought to that bank magus. Every crisis unfolds with a certain character.

We make note of Sweden's wonderful work many many decades ago and inventing a whole bit of central bank theory with how Stockholm handled a crisis. The theme right now seems to be the shadows or the mysteries of private equity and venture capital in America. Conservative money is addicted

to the potential return of that group. Are you exposed to private equity and venture capital long term locked in holdings and do you worry that there could be some real issues there with liquidity in our equity portfolio, our investment model is predominantly focused on more mature companies and we invest directly in those. So we're looking for strong cash flow RODDAM potential growth and future positive cash flow.

With that set, that means that we don't we basically don't have any private equity exposure and VC exposure, not portfolio. You've been doing this for a few years. Do you assume in crisis, with the way yields are gyrating, the way all central banks have become more restrictive in the last four or five days, do you suggest that not the actual assumption, but just the expected return of pension

portfolios will come down. Yes. I do think that the next ten years will be more difficult to generate return, and I think we will see changes in the investment models in the pension fund industry in order to secure adequate return for for the beneficiarcy. Sir, My great theme here is we've had interest rate come in as we've

come back and normalized yield, certainly normalized yield. Within the europe p and sphere as well, is a troubled non profitable companies what we call in America zombies, that they will go away, whether they're banks or anything else. As well. Do you suggest that we will see combinations and transactions to clear out companies have had essentially a free lunch

for sixteen years. Yeah, I do think some companies are have benefited too much or all the center banks put and the fact that we've been living in the world for many years where cost of capital has been basically zero, and I don't think that that is sustainable little long term and I would suspect that some businesses out there will struggle to adjust to more normalized interest rate level long term magnets as you and I talking, as we're

all speaking, the first Deputy Governor of the Swedish Central Banks address in Parliament at the moment, suggesting that we need more timing despite well it's ability. There are people who believe that things are breaking now and these central banks need to back away. Can we finish on that? What's your take on that? So I didn't hear the question that properly, so could you I can repeat it, sir?

By all means. So, the first Deputy government of the ricks Bank is speaking to Parliament right now suggesting that we need more tightening despite the volatility. Magnus. As you know, the conversation in the last twenty four hours is that people, some people believe things are breaking and central banks should

back away. What's your take on that, sir. I do think that we in the market space today actually see a de facto tightening, and I think that should be catered into the policy decisions to be made going forward. And it's very difficult assessments to make, obviously, but I'm a little bit concern that we're breaking or breaking the markets if we're too aggressive. Obviously, we need to bring down the inflation because that is the long term number

one fall for all the market participants. But it's a balancing act here, and I think again that the current defect of marketing, it tightening, that's happening, should be catered into the consideration. Magnus, is a difficult time for everyone, particularly for you this morning, and we appreciate the opportunity to speak with you at that difficult time. Thanks for BEINGMDUS. Magnus billing the I've elect a Swedish pension fund with exposure to all the wrong names. This is a joy.

His name is Ethan Harris. He's an author. He's also had a global research at Bank of America's Securities and stopped economics with appression book Ben Vernanke's Fed a few years ago. In that book, you talked about a theme I just talked to Vincent Reinhardt about, which was the shadow of Alan Greenspan. Are we in this mess, doctor Harris, because we became unmeasured? Well, I think that. I don't think Alan Greenspan's legacy is really that strong right now.

I think we got into this mess because, like a lot of central banks and a lot of economists, the FED started to believe that inflation was largely dead and you didn't have to worry about a sloped Phillips curve to put a technical term on it, and so they adopted a very passive monetary policy. Now we're seeing a massive ketchup by the FED, and of course financial accidents happen when you're hiking rates very fast, and so some of this is a legacy of the FED and other

central banks starting too slowly to deal with inflation. The legacy and reality that I've seen within Brian moynihan in his Modern Bank of America is he's viscerally granular. Brian, more than any other CEO I know, has a granular feel with all that research on your banking side, do you see a financial integrity to our banking system beneath the massive Bank of America. Well, I don't want to comment on Bank of America specific, no, I mean on

the other banks. So I think then that Moynahan's glued to when I think one of the questions for investors these days is how healthy is a banking system? And I think, as your previous guests said, the banking system overalls and excellent health. It's heavily regulated, heavily capitalized. You're always going to have during periods of stress, some events, and I would think of this as a stress event in the context of otherwise not just strong financial banking system,

but strong financial system in general. So when you look at the balance of risks right now, and this is something that I've been giving a lot of thought too. If the financial system is strong, you have these supports, you get a best sense of a rebound. It doesn't really tighten financial conditions all that much from where we were, and in fact, given the lower expectations for FED rate hikes, you have easier financial conditions and you did just a bit ago. At what point does that become a huge

risk for inflation that does not come down. Well, I think we need to recognize that we're in the middle of a of a stress event, and so it's very hard to predict where things are going. The markets will always price out the central bank during a crisis like this. But the real question is does the policy efforts. Does the attempt to ring friends the problem? Does it work. If it works, the FED then goes back to their regularly scheduled program and they have to deal with inflation.

If it doesn't work, then monetary policy gets drawn into the process of supporting the financial system. Our view is that ultimately the ring fencing works and the FED goes back to hiking interest rates. So I think our view would be that the markets understandably are in a very risk off mode, but ultimately the Fed's going to end up having to fight inflation. And this is the reason why you're in the camp of another twenty five bases

point rate hike next week. But I do wander longer term whether the signs of stress have kind of gut checked your sense of how much these long and variable lags have come to the four and put a higher or rather a lower cap on how high rates can go well. I think that unquestionably this this stress and the system now titans financial conditions and is a warning about the lag defects of monetary policy. It's actually been surprising how little impact the Feds had up to now.

They hiked at a very fast pace. Now we're seeing some effects, and perhaps an extreme effect, and so it does have to make you a little more cautious about how far the Fed needs to go. Mike. But let's get out in front of Michael Gapan in the next hour with John Ferrell. He's a good economist, I mean he is, I think so. But let's get let's get the hair escape in view here. Did they hike too rapidly?

Were you guys sitting over the last number of weeks going at the rate of change and Newtonian calculus of all this dance is just a little bit off. No, I don't think so. I'm sitting now. I think that the the original error was waiting too long to hike. The graduate was some of green span. You know, the idea of hiker early so you can hike slowly wasn't carried out and wasn't the stands of the shadow of Greenspan.

Here the shadows do it that they didn't do with Well, we got to just go to Michael mcughs diving into forty seven pages of inflation data. Goods you said was one percent. Can you joyous about a service disinflation? No, Unfortunately, services go up a little bit seven point two six percent. But a lot of that, as we mentioned, is housing owner's equivalent rent up seven tenths, same as it was

last month. Rent of primary residence up eight tenths. That's a tenth more than it was in the month of January. But also we got a big boost in the lodging category. For shelter, it's up two point three percent. That's more than double what it was the month of January. Air fares were up. But here's an interesting thing, and it'd be interested to see if if Ethan would go so far as to extrapolate the way I'm trying to hear.

But if you're looking at where you might be seeing wage increases, we've talked about leisure and hospitality a lot. Food away from home up six tenths for the second month in a row, and full service meals up six tenths. That's a tenth higher than it was so prices are going up at restaurants, Alcoholic beverage prices went down. I'm not sure if that's not went down but tailed off

in inflation. I'm not sure as Tom help with that, But to that point, and Ethan, I'd love you to weigh in on this, because we have seen people willing to spend, and they're willing to spend on services, and that isn't diminishing. Distress in the financial system really change that. If people can get their deposits and everyone just goes on their way. Well, if you can get past the panic moment here in the markets, which it is, you're back to an economy that's solid. It hasn't threatened the

recession yet. As Mike pointed out, there's a lot of inflation in areas where labor class are important. You can't fix your inflation problem just by getting an improvement in supply chains. You need to get the service side under control. You need a normal labor market, and we don't have a normal labor market just quickly. I'd love your sense. Vincent Reinhart was on and he said that if this FED reserve comes out and doesn't hike rates because of

potential financial system stress. It is basically saying that what they did on Sunday was not effective, that that program was not sufficient to stave off any distress. Do you agree, I mean, do you think that if they do not raise twenty five bases points that will be a policy error given the data we've seen. I would never contradict Vince. He and I were grad students together, anyways. No, I think that. I think that it depends on how stress

the markets are. If the markets are in serious distress, pausing is okay. If they're improving a lot and the ring fencing is working, then you can start to wonder whether the FED has confidence in its ring fencing. So think that's a legitimate concern. You and Vincent Reinhardt were the laureate Ned Phelps. His later career is dynamism. Do we risk losing our dynamism because of this crisis, and

particularly the Silicon Valley crisis. Well, I think that there's been The COVID crisis itself has taken some of the mojo out of the economy. I think that the tech sector to some degree has overexpanded. I think this is a temporary thing for tech. Tech is still going to be a driver of growth going forward. Don't be a stranger. Ring mister moynihan with you next time. Doctor Harris is with the Bank of America. We are thrilled to have the former banker of Little Rock with us right now.

He is a name that will become very familiar to Americans here in the study of this financial blow up. He is french Hill, Republican from Arkansas. French Show. When you were at Vanderbilt, if you went down forty and north on two sixty five, you ended up where this debate began, at the Hermitage. It Andrew Jackson's spectacular home east of Nashville, and that's where this debate started, the raging debate over the Second Bank of the United States.

The Republicans are Jacksonian, They're scared stiff of the big money of New York, etc. Etc. And the Democrats of the urban milieu push against that. How is this battle going to play out? Are we still in fear of the Second Bank of the United States? Well, Tom, I love the history lesson and the Hermitage is a beautiful spot. And Jackson was a super controversial president. But today we're faced with a situation where I think after ten years

of easy money and amazing amounts of fiscal stimulus. I think some management teams have forgotten their prudential obligations to their depositors and their shareholders. So we have a real laxity and risk management in some of our financial institutions, and perhaps we've got laxity in the supervision of those institutions as well, particularly in the case of Silicon Valley. Do we need to treat the banks such as Delphire

that you ran in Arkansas? Do we need to treat smaller banks like the bigger banks out of Dadd Frank? Do we need a one regulatory system? Is that the lesson learned well? I think some of the costs of Dodd Frank on small banks made them less competitive, harder to earn a return on invested capital there, and that's why Democrats and Republicans came together, as you noted earlier, and Barney Frank supported it to make modifications in Dodd

Frank's regulatory burden on small financial institutions. I don't think that in any way, shape or form reduced the obligations of the bankers for their risk management legal requirements or for the supervisors to do their routine job on a quarterly basis to make sure the system is safe and sound. Comngressman, you keep mentioning the supervision, and I'm wondering how much you fault Jerome Powell's voter to reserve for the lack

of supervision that you're talking about. Well, the Silicon Valley Bank clearly had risk management problems in their strategy about short term deposits that were unensured invested in long term treasury and mortgage securities. And the California Bank Regulators, the state bank regulators, were the principal regulator, backed up by the San Francisco Bank of the FED, and so they

do have a supervisory obligation. This bank grew very very fast over the last two years, and that is usually a huge red flag to supervisors, and perhaps they could have intervened and helped the management team steer in a much more safe and sound direction. Do you think that things have stabilized enough that you have confidence, given the intelligence that you've received, that the stability in the financial system is sound and that we're unlikely to see something

else like this in the near future. Well, you never know what's going to happen. In the future. But we do have a safe and sound banking system with good capital and good earnings and generally good liquidity planning across the nation. I think that's clear over the past decade.

But I think with the low interest rates at zero and then a sharp increase in short rates, some management teams were not prepared for handling that in the right way, and so we may have bumps in the road as a result of that, And you've certainly seen that in the case of Silicon Valley last week. Congressman. You've come on the show before and talked about how inflation is at tax on the poorest members of our society, about how when inflation gets this high it becomes punitive for

so many families. How important is it from your vantage point to see the ongoing rate hikes or some sort of continuation in monetary policy regardless of some of the concerns that we've seen in the financial system, or do you think that this is the clarion call that perhaps what we've seen is enough. Lisa, it's a it's a tough question. As I've said on your show before, that's the anguish of central banking to try to balance these factors.

But look, the FED has a central obligation to all of us in our families of price stability, so they've got to have that as their principal mission. But they'll look at financial fragility as well. But I think the FED should stay on track, using their best judgment and looking at the data and make sure that they can beat this inflation and get it back down to closer to that target of two percent. If we get to

some new insurance regime. The belief here, Congressman, is the banks are going to pay for it, not to taxpayer. I get that idea, But is our Vest Bank of Bentonville, Arkansas? Are they going to have to pick up the tab for the irresponsible behavior of West Coast technocrats. Yeah, Tom, this is a great question. And you know, back in two thousand and eight and two thousand and nine we moved to risk based premiums based on the bank's camel rating,

their risk rating by the regulators. That was a step to making sure that people who run a poorer shop pay a higher deposit insurance premium. Now the question is should we have some sort of premium on top of this risk based premium that would cover these sorts of situations where a bank is determined to be like they did this weekend, systemically important, and yet we're ensuring deposits for which no premium was paid. I think this is an important area for policy to consider. We looked at

it back into O eight to ten. I think we need to look at it again in the face of this new banking system and Twitter runs, which is what was precipitating this collapse last week. Let's meet in the rotunda. What is the common ground, Congressman Hill, of you and Senator Warren Well, I think both Senator Warren and I

want a safe and sound banking system. We want to make sure, for example, in the digital assets space, that the rules of the road are clear, that we don't have this speculation that we've seen in that market, and that criminals are prosecuted and fraudsters are prosecuted. But I would say to Senator Warren, look, we have a robust regulatory system with plenty of rules on banks of all sizes. What we need to see is vigorous supervision of those banks by their primary regulators at all stages of the

economic cycle. Does not mean Congressman walking back some of the deregulation we silk I throw in twenty eighteen. You know, Jonathan, I don't think so, because it was a very bipartisan, very modest tiering of the regulatory structure that came out of Dodd Frank. I don't think you can lay that. I don't think you can lay the collapse of the banks last week at the foot of twenty one fifty five.

I don't know. I just don't think that's relevant. I think what is relevant is risky management practices, with or without Dodd Frank and lack of supervision by the primary regulator. The reason I stats because they regulate to use the systemic risk exception to make depositus whole. And Congressmen, what we've acknowledged that the weekend is that basically all banks in America carries some degree of systemic risks. So should

they all be regulated in the same fashion, regardless of size. Well, I think tiering is important, But that gets back to Tom's good question about deposit insurance. Should we have a premium on top of the risk based premium that somehow reflects that systemic risk and that would be something that somebody would have to think through analytically. About how one

would assess that in a fair and balanced way. But that speaks to this question, because you're right, the regulators this weekend determined that Silicon Valley's reach went well beyond its branches in California and New York. Is it related

to the economy? A comlreishment always creates to get your perspective the banking system, the politics on a day, Congressman French Hair god a politician with actual David George, senior research analyst, bared very importantly with decades of experience, David, what are you writing this morning? Let me just cut to the chase. What matters right now for David George M We wrote this morning, Tom, good morning, thanks for having me. We we believe that this is an asymmetrically

positive risk reward for regional bank stocks. In fact, probably the most constructive that we've been since COVID, maybe even more constructive than that. This is one of the best setups that we have seen in the last twenty I've done this twenty three years, and this is an unbelievably good risk reward set up stock. What is the skill set to determine that a given bank is not seeing outflows and that given bank has trust and confidence. Well, you know, part of it is obviously it's it's difficult

to predict customer behavior. But I think something that has gone undiscussed in the financial media is and I don't cover Silicon Valley, but I think it's important to note that they have two hundred twenty billion deposits. Still, how many branches they had eighteen? Do you know how many branches US Bank has five thousand? The average deposits per branch at most US banks is about fifteen to fifty million,

not two billion per offers. So the granularity of most US regional banks funding is just infinitely different than the kind of banks that have been reported that have failed.

So obviously we are in a period where investors have long memories and there's panic, but that is where you get these asymmetric opportunities, and that's where we are in my O. That said, David, there's a very different scenario that is uniform pretty much across all the banking sector as well as beyond which is the immediacy of being able to withdraw in real time online at any time, the ability for there to be a bank run that

happens so quickly that even regulators are caught completely off guard. How does that change your risk assessment of smaller banks, especially at a time or cash is paying something and a lot of people are concerned that these banks are not going to be able to deliver. Well, first of all, I am not concerned. Maybe that doesn't matter. But to your second point, at least the movement of funds into treasuries and higher yielding alternatives, that's been going on for

over a year, so that is not a new phenomenon. Now. How people feel about that given where the stacks have been trading is new, but fundamentally that has been happening for several months and several quarters. In terms of the movement of deposits and things like social media and media like yourself talking about bank runs, that's really not that helpful, to be honest, to depositors, because most customers of regional

banks do not have millions of dollars. They've got maybe five thousand dollars in a checking account, maybe a small business has got a hundred thousand. They are not focused on this, They are focused on running their businesses. So I just think that the similarities between silicon ballets and most other what I would call main street banks couldn't

be more different. That said, there is this concern about the interest rate risk at a lot of banks, and I am wondering, from your perspective, putting aside, you know what the media's role is, or what investor's role is,

or what the reputational risk is. What about the nuts and bolts, potential unrealized losses and the balance sheets of a number of regional banks that haven't necessarily hedged against a dramatic rise in interest rates, and among all of their assets they used to back those customer deposits, well, a couple of things. So banks, as part of the Frank legislation have to own securities as part of what's

called the LCR liquidity coverage rations. And keep in mind, Silicon Valley and banks under two hundred and fifty billion ATHLETs are no longer subject to that legislation. All of the big banks that we talk about are all subjects in that. By the way, that's another thing that has gone unreported and unnoticed and undiscussed in terms of the interest rate risk. Yes, there are banks that are sitting

on securities. These are money good securities, by the way, These are treasuries an mbs that pay us agreed, These are not subprime loans, these are not CBOs. These are money good securities and by the way, deposits have value as well. They are not marked to market either. So despite that, you have banks that are generally jap market. Would they make last quarter or eight billion of earnings? B of A made five billion of earnings. This is just not a crisis. Two thousand and eight was a crisis.

This is a very short term crisis of componence driven by one bank that was essentially a levered funds So um, from my perspective, there are obviously unrealized losses, and by the way, with bonds rallying, those losses are now becoming games and that will change over time. But most banks

will hold these these securities until maturity. Um. Yeah, but I think I think just to say that these banks aren't managing interest rate risks, I think is not an intellectually honest statement from my perspect Well, David, it's always fantastic to get your perspective repeatedly through this conversation. You do sound somewhat frustrated with the way this story has been covered over the last three days. What would you like to say here more of going forward? What are

the questions that you think have been missing? Um, I just think that that the constant focus on is your money safe? It's just and I think the prolifration of social media is obviously something that you're not necessarily engaged in. But but I think it's just too I think I think it's important to to just distinguish between banks and

their funding and their customer bases. And you know, this particular situation is frustrating when you've got a not to get political, but when you've got a VC legend tells everyone that screams fire in a crowded theater, that's not helpful either. And that's a whole other discussion. But I think I think the main thing is just having some differentiation between banks. And by the way, there will be

beneficiaries of this. All of the large banks, as you kind of referenced a little bit earlier before we started the show, they will benefit from this. So there will be your big ten to fifteen banks, Ye will be net beneficiaries, which which is something that again I think it's not been discussed, and those stocks have gotten smoked as well. It's something we've talked about a lot over the last three days. A lot of money is going

to go to the SI base. There's going to be a premium attached to them, just in terms of safety, safe safety. David, this was great. Let's try and make this rankular because I have no doubt it's going to be a story for the next couple of weeks. Maybe have the next couple of months, David, George, that of bat. Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify and anywhere else you get your podcasts. Listen live every weekday starting at seven am Eastern. I'm Bloomberg dot Com, the

iHeartRadio app, tune In, and the Bloomberg Business app. You can watch us live. I'm Bloomberg Television and always I'm the Bloomberg Terminal. Thanks for listening. I'm Tom Keane and this is Bloomberg