Digitization helped spur spectacular banking failures

​Clearly, these are not the same as your grandfather's bank runs.

​There’s a pivotal scene in the holiday classic film “It’s a Wonderful Life” when panicked depositors at the Bedford Falls Building & Loan swarm en masse to withdraw their funds. Protagonist George Bailey averts a bank run by explaining fundamentals: “You're thinking of this place all wrong, as if I had the money back in a safe. The money's not here. Your money's in Joe's house, right next to yours, and in the Kennedy house, and Mrs. Macklin's house, and a hundred others.”

That was then. As the recent rash of bank closures have shown – including the collapse of Silvergate Capital Inc. and Silicon Valley Bank, both of California, followed by that of New York City-based Signature Bank – failures are immediate, with an acceleration largely fueled by digitization. It’s clear that no elegant, Great Depression-era soliloquy appealing to a sense of community would have helped avert a bank run in the real world today.

How digitization is changing finance

In a recent telephone interview with Mortgage Professional America, Emmanuel Daniel detailed differences from the past that allow for bank failures to occur at stunning speed and shock-and-awe spectacle. His new book, “The Great Transition: The Personalization of Finance is Here,” has garnered rave reviews for its prescient insights on the personalization of finance and its attendant perils.

“What has changed – and is changing – the nature of banking of the US and globally is driven by several new factors,” Daniel said. “The first factor is because of the digitization of finance, a bank run is instantaneous, immediate and ruthless. In the old days, a bank run used to be thousands of people queuing up in front of the bank, and the bank still closing on time at 5 p.m.,” he said.

Even after the bank closed, it would be days before the dust settled to assess the level of deposits left intact, he added. “Today every customer can just go online and demand to have their deposits withdrawn. Technology itself is a dimension that affects how banks respond and the options that are open to them.”

How do banks measure liquidity?

Then there’s the matter of liquidity that adds to the sheer spectacle of collapse: “The amount of liquidity the central bank has passed into the system and then the COVID recovery program and so on resulted in an incredible accumulation of deposits in the banking system,” Daniel said. “In the past, when a bank had access to an incredible volume of deposits, it actually worked well for the banks. In the US system, there is a history of banks having redeployed the assets they receive into high-yielding assets,” he said, pointing to Treasury bonds and mortgage-backed securities as examples.

Ironically, the recently failed banks had been largely following the same tactics, Daniel added: “In one sense, what the banks had been doing is no different than what they have always been doing.”

But the old template – the “balance sheet of traditional banks,” – may no longer apply, Daniel suggested: “Having access to cheap sources of deposit was an incredibly powerful proposition for banks,” he said. “It meant there were many things they could do with cheap sources of funding. But now the balance sheet is starting to change, and it has called into question some of the regulations that have been put in place after the 2008 crisis.”

The upshot: “Regulators will now need to look back to the balance sheet of a bank and say, ‘What do we allow banks to do going forward?’ And I think that’s going to be a long, long haul because the nature of the securities that the banking industry invests in has new risks that didn’t exist before.”
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A global entrepreneur, Daniel is the founder of platforms such as The Asian Banker and Wealth and Society, through which he has had extensive contact with leaders in banking and finance around the world. Given the banking turmoil that has recently unfolded, the insights from his book are suffused with a measure of prescience. He suggested as much himself: “I actually predicted that the next crisis which is underway at the moment will be predicated not by any underlying asset on the balance sheet of a bank but on the perception of its ability to meet its obligation.”

The breadth of insight presented in his book has drawn praise from business and political leaders:

• “Emmanuel Daniel’s “The Great Transition” is extensively researched, an encyclopedia of the past, the present and possible future of the financial services industry,” Dick Kovacevich, retired chairman and CEO of Wells Fargo, wrote. “Based on his decades of experience as a worldwide consultant, especially in Asia, he describes how the financial industry’s drudgingly slow and glacial transition to the future will accelerate at warp speed in the digitized world of tomorrow. He describes what is going to happen, why it will occur, how it will proceed, and what you have to do to be successful. Digitizing existing products is not the answer, he says. The products must change, be personalized, and be device agnostic.”

• “There are two types of books currently on the market today—those that predict the demise of banks due to changing technologies, and those that predict the demise of cash resulting from the development of digital currencies,” Ron Shevlin, chief research officer, Cornerstone Advisors and senior contributor for Forbes, wrote. “The Great Transition: The Personalization of Finance is Here” creates a new category. Like other books, there is a discussion of technologies like cryptocurrency, APIs, and blockchain. But unlike other books — which often just proclaim the technologies’ ascendency and predict they will ‘change the world,’ — The Great Transition goes behind the scenes to define the anatomy of innovation and why technology will lead to a fundamental reimagining of financial products and cause today’s institutions to crumble.”

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• “This is a tough book in the very best sense of that word,” former US Congressman Barney Frank wrote. “Readers should be prepared to pay serious attention to complex issues of fundamental social and economic importance. Unlike many whose familiarity with a particular status quo induces a sense of comfort in their thinking about the subject, Emmanuel Daniel builds on his lifelong study of the financial system not to just confront the hardest questions that have been raised about it since the crisis of 2008, but to formulate newer and more profound ones.”