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 “Today every customer can just go online and demand to have their deposits withdrawn.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.”
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