Tyler Cowen: belief

Transcript context

…I don’t think I need huge amounts of consolidation to do that, but I think that you look at Silicon Valley Bank as a good example or Signature Bank as a good example of what happens in an environment where you have smaller banks doing things that aren’t necessarily the right things without the backstop that you’d prefer. Now, you could argue that the government turned out to be the backstop. The FDIC turned out to be the backstop, and it worked, so maybe we’re in a good position. The other thing, though, that I do worry about — and I’d also be very curious about where you land — is we now are living in a very bifurcated world as it relates to the loan market and credit market in America, which is, really, post–financial crisis 2008. The private credit business has just exploded. If you’re a company seeking credit, you’re oftentimes not getting it from the bank. You’re getting it from, effectively, the shadow banking system. Some of that shadow banking system is attached to the insurance industry in certain ways. Potentially, it presents all sorts of risks that I’m not sure we all understand. I agree with that. This is my biggest worry. I don’t think I know how to solve it. Formal banks are about 20 percent of lending, so 80 percent is other stuff. It’s regulated in other ways, but it’s not protected by what we would consider our core regulatory structures, and the more you impose capital requirements on banks — FDIC premia, other regulations — you just make that smaller. It’s already trending downwards. That’s why I’m reluctant to induce these banks to do more local community lending. Ideally, you’d like, maybe, the banking system to shrink more slowly than what it’s doing. The stuff you have left — I don’t think you can insure it, really. You hope it’s well enough capitalized. You can’t bail out everything. I don’t think we have any idea what to do about it. What’s your thought on that dilemma? This is probably my biggest concern, and I just don’t know what the inflection point would be that could turn it into a problem in a demonstrable way. I don’t fully appreciate or understand how connected we think the private credit funds are to the banks themselves. Some of these funds are effectively leveraged by dint of the banks. Some of them have liquidity lines back to the banks. You could argue that the private credit funds should be less risky insofar as there’s a better duration match around those loans. They’re not going to be called by the day. You know when they’re going to be called in, hopefully five or ten years or whatever the length of the fund and the loans are, but if it all comes undone at one moment, what happens? That’s like a horror movie to me, but I don’t know the script of that movie or what that book would read like at the moment.…

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