One thing we have already discovered about social media is that lies, innuendo, and gossip travel at five times the speed of truth and cooperation. So, we have to be very careful about consumer behavioral economics.
Recent consumer and cognitive behavioral research inform us that humans are really bad at predicting and assessing risk. We’re extraordinarily bad at it. Humans have ways of looking at reality that include short cuts leading to an individual’s perception of reality, usually based upon prior experience. This can, and does, lead us astray as we attempt to predict and evaluate levels of future risk. Now the last time I checked, deposit insurers are still staffed by humans. I don’t think we’ve been replaced by an AI algorithm quite yet. Are we any better at predicting and analyzing the risk in the system that’s right before our eyes? I’m not sure. Silicon Valley Bank, in hindsight, was clearly an apparent risk and ready for disaster. This bank, by the way, had a Boston office; they had a large book of business in the tech community in Boston, and we experienced part of the bank run. Luckily, it didn’t make a lot of TV coverage because the media was focused on California, and I’d like to keep it that way. Silicon Valley Bank were gurus in their industry; they were THE place you had to bank if you were in high tech. It was a cultural draw. The end result was that 94% of their deposits were uninsured. The management failed at basic asset-liability management in a rapidly rising interest rate environment. I don’t know, did the CEO and the staff there actually take an asset-liability class? And there is plenty of blame to go around – all of us missed the implications of the risk in that system – even though the risk factors were well known and apparent. We had capital rules that favored U.S. Treasuries. I’m now reminded of the view that long-dated US Treasuries are riskless. Right? Okay, except in a rapidly rising interest rate environment. It reminds me of what Sheila Bair was talking about at the Gala Dinner last night. Previously, conventional wisdom believed that American real estate mortgages were riskless. Right? Well, the 2008 crisis proved that we were again unable to perceive the risk right before our eyes. My concern is that Silicon Valley Bank and Credit Suisse are merely warnings of destabilizing factors that are already present in our system, and I’m concerned that we’re not perceiving the risk in a way that gives us a fighting chance to successfully resolve the next crisis. So, I think that the revolutionary question before us, and the question that we need IADI to help us with, is how do we address this, how do we consider it, how do we build our resilience and our agility and the quickness of our responses
We deposit insurers are in fact the global safety net in the consumer’s mind. So, when it all falls apart, we have to stand and deliver when it matters most.
And deposits? They’re no longer “sticky”. It was once hard for consumers and small businesses to move their deposits from one institution to another. Now deposits are quite “slippery”. Consumers can move their deposits with a click, creating enormous volatility for the institutions we insure. These factors, and others, will prove disruptive to the business models we insure, and they will prove disruptive to us. As we consider these new and significant challenges, remember that what we do is important. As some of you heard me say earlier this week, we spend a lot of time talking about resolution schemes, structures, supervision, and receiverships. Consumers don’t even know about any of that - and they don’t care about that. But when they get scared, they look to us. We, deposit insurers, are in fact the global safety net in the consumer’s mind. So, when it all falls apart, we have to stand and deliver when it matters most. Our level of resilience will make all the difference in a crisis. MSIC’s research indicates that we are all in for a very difficult decade in which institutions we insure may be at a destabilizing level of risk. We hosted this conference to start the discussion about how we need to manage systemic risk in this new revolutionary era. The last 40 years have reminded us a few things about systemic crises. They hit at the speed of a runaway freight train as it derails: and it feels about the same way when you go through one. Oftentimes, those crises have resulted from facts that were readily apparent to us in hindsight, but we all missed the level and implications of the risk.
18 INTERNATIONAL COLLABORATION
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