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- [00:00]
Barclays Brief Announcer
Markets move fast. Get the insights you need in 10 minutes with Barclays Brief, a podcast from Barclays Investment Bank. Each week our experts analyze market themes, helping you anticipate what's next. Listen to Barclays Brief wherever you get your podcasts. Bloomberg Audio Studios Podcasts Radio News.
- [00:34]
Joe Weisenthal
Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.
- [00:38]
Tracy Alloway
And I'm Tracy Alloway.
- [00:40]
Joe Weisenthal
So Tracy, one of the motifs, I guess, of some of our recent conversations.
- [00:44]
Tracy Alloway
Motif is a good word.
- [00:45]
Joe Weisenthal
It's a good word, isn't it? Thank you. One of the motifs of some of our recent conversations and also I guess one of the mega trends of our time is this idea of just like scale is a competitive advantage. Size returns to size returns to scale. The ability of someone to like pick up a phone and say I need a lot of money right now. And the advantage that accrues to financial players. It's, we see it across a lot of sectors but it really, it stands out a lot in our finance conversations.
- [01:13]
Tracy Alloway
It feels good to be big in business, right. Like once you get big, you have all this competitive advantage that allows you to get bigger. The place where this is most noticeable, I would argue, and it's been this way for a while, is the banking industry. Right. Like the long run trend among US Banks is the big get bigger. And we've all seen those charts of like all the little banks that compose bank of America or JP Morgan. I love those charts.
- [01:40]
Joe Weisenthal
I do too.
- [01:41]
Tracy Alloway
And that's the direction the industry seems to be heading.
- [01:44]
Bill Demchak
Right?
- [01:44]
Joe Weisenthal
Right. It's so interesting to me to like, to think about like these analogs with tech because it's the same in tech. Right. If you look at big tech and we talk about the Mag 7, et cetera, they've really outperformed middle tech or small tech. It is truly incredible and we have intuitive reasons for understanding of that network effect, lock in and so forth. And it's so fascinating that some of our story that we tell in tech must be a little bit insufficient because we see the same story replicated as, as we're talking about with banks. And with banks it seems to be a couple fold as like one is balance sheet capacity, right. And the ability to do big deals and so forth. And then of course there's the other thing which is just like the sort of the menu of services that you can offer a client if you're a big bank.
- [02:28]
Tracy Alloway
Right. And also just the fact that you have, well, balance sheet, you have a lot of money. So if a juicy Deal comes up, you can deploy it quite quickly and you get like first dibs on issuance, which has been good in the recent credit market.
- [02:41]
Joe Weisenthal
So we haven't done like a ton of pure banking episodes, although we've done some. But you know, we did the most probably right in the wake of Silicon Valley bank obviously. And we talked about like the challenges of some of the community banks or the sort of smaller regional banks, et cetera. And then we know like the huge scale of like the JP Morgan's of the world, but also like what about the banks? Like just sort of like sub JP Morgan scale. Not necessarily super regionals. I believe they're called super regionals. Interesting perspectives of their own. And so, and I've always said I love talking to bankers, people who understand how banking works. Just like I think they're usually some of our most interesting guests.
- [03:21]
Tracy Alloway
Have you looked at the KBW bank index by the way?
- [03:24]
Joe Weisenthal
Not today, actually. Not in a few days. Or maybe not in a few days.
- [03:27]
Tracy Alloway
Not in a few days.
- [03:28]
Bill Demchak
Yeah.
- [03:28]
Joe Weisenthal
How's it been doing?
- [03:29]
Tracy Alloway
It's up quite a lot. In fact, I think over the past 12 months it's outperformed the S&P 500. So that kind of tells you how people feel about banks and bank regulation at the moment.
- [03:39]
Joe Weisenthal
Absolutely right. One of the things when Trump won it was the sort of like the deregulation trade and that was one element and arguably I would say in finance, by and large, though 10% credit card caps does not scream deregulation. I would say that's one of the areas in which the expectations of Wall street have actually been met by and large by this administration. Anyway, I'm very excited to say we really do have the perfect guest to talk about the banking world in 2026. We're going to be speaking with Bill Demchak, CEO of PNC Financial, which is the sixth biggest bank in the country, I guess a super regional. So Bill, thank you so much for coming on odd lots.
- [04:16]
Bill Demchak
It's great to be here. But I. Correct, we're a national bank.
- [04:19]
Joe Weisenthal
National bank, yeah. Why did I say super regional? Did. Were you once that?
- [04:24]
Bill Demchak
Yeah, because we have the mega banks and people don't know what to call somebody like us. But we're in.
- [04:29]
Tracy Alloway
I always thought super regional was just like that category below the mega bank.
- [04:34]
Bill Demchak
But I mean a regional bank is a bank that operates in a region.
- [04:37]
Joe Weisenthal
Okay.
- [04:37]
Bill Demchak
Right. We're across the country, we're in the largest MSAs. We're in every state. We. So we're just, you know, 1/6 the size of a JP Morgan.
- [04:46]
Joe Weisenthal
Got it.
- [04:46]
Bill Demchak
But we're still a national bank.
- [04:48]
Joe Weisenthal
Excellent. Well, since we're just in the, since we're in the correcting the record phase of the conversation, I'm certainly familiar with the PNC brand. You see it on things elsewhere, probably like a stadium somewhere. Is there a stadium somewhere?
- [05:01]
Bill Demchak
We have PNC park for the Pirates.
- [05:03]
Joe Weisenthal
PNC Park. So there you go. But why don't you just give us the big overview, like what is PNC Financial?
- [05:09]
Bill Demchak
We are a traditional bank. We used to call it Main Street Bank. Maybe that fits, maybe it doesn't. But you know, we help people save, we lend money, we do investments, we move money through payments. We're a bank that aspires to be, you know, coast to coast with a, with a retail presence. As retail share consolidates in the U.S. you know, our sweet spot is larger middle market, smaller large corporate. But of course we do commercial and business banking. We're active in the capital markets across basically every product but new equity issuance, but more of a traditional bank. So when you were talking about scale in your intro, think of JP Morgan. They've gotta be in 50 countries, they're in multiple lines of business. Beyond traditional banking, we have scale and what we want to do. So there's scale in the things you choose to attack versus scale. Just measuring balance sheet size. Got it.
- [06:09]
Tracy Alloway
You have been growing though. You made an acquisition recently. First Bank. Is the ambition to be as big as some of the G sibs, like the national giants, let's say the ambition.
- [06:22]
Bill Demchak
Isn'T about size, the ambition is about being relevant. So one of the things going on, backdrop to the US market in particular is there has been consolidation in retail share and banking ever since they got rid of interstate banking laws. That continues apace with the mega banks largely winning at the expense of the very small banks. And so at some point in the not too distant future, I suspect that there's going to be five or six players who control retail in the U.S. the Canada model. Yeah. And our aspiration, and we're on pace to do it, and we think we can do it, is to be one of those five or six banks. What size that leads to, I don't care. You just need to be relevant to consumers everywhere in the, in the country. And you shouldn't be disadvantaged because you don't have presence in a particular market.
- [07:14]
Joe Weisenthal
Well, maybe we should just answer the really simple question is like what? How would you articulate why the really big banks continue to win share of the retail Market, I could come up with some answer, but what's the real. How would you describe it?
- [07:29]
Bill Demchak
It's ubiquitous market presence. You know, once you get over 7% branch density in a particular market, you tend to outperform under the assumption you have an okay reputation and decent products. You know, that you don't have to have the best, but you have to have the menu of all the digital applications, digital signature branches in the right place, you know, electronic transfer, all the things you come to expect from the bank you guys probably bank at. You get there and you grow. And if you think about that definition, there's only three or four banks today, actually only two that fit that definition. JP Morgan and B of A. Now Wells, you know, has the potential, you know, now that they've gotten rid of the acid cap and so forth, to continue to grow. And then you have some aspirants who'd like to get in there. We're clearly one of those and one of the, one of the people who's been after this game probably longer than most.
- [08:25]
Joe Weisenthal
Just. Sorry, what was the metric that you cited? 7% branch density. What does that.
- [08:30]
Bill Demchak
Yeah, so. So by the way, we use 7%. Other banks will talk about 8, but it's somewhere around there you get to a place where if you have presence in a market 7 or 8% of the share of just physical presence with decent products, you control a disproportionate share of the actual deposits and economics coming out of that market.
- [08:52]
Tracy Alloway
So I'm actually surprised to hear that because the story, you know, that's dominated since the financial crisis has basically been that physical branches don't matter that much.
- [09:02]
Bill Demchak
Yeah. So you've seen across the US Net, closures of branches is off the charts relative to new builds. But what you see behind the scenes is somebody like PNC, where we are, if you think about our very dense markets, where we've been for 165 years, we're thinning those branches because you don't need as much. But we're building aggressively in Houston and Dallas and Miami. We were building in Denver till we bought First Bank. So going to all these growing markets where the population's moving, man, it just.
- [09:36]
Joe Weisenthal
Occurred to me, I already. After we do this episode, I want to follow up and do an interview with whoever your main person doing site selection is. Because we've done episodes on retail drive through site selection, grocery store site selection.
- [09:51]
Bill Demchak
We have a great team. We're building, by the way, we've announced we're building 300 branches in these New markets. And as an aside, once we knock 100 off, we'll add another hundred, so it's going to keep going. We're probably 1,000 short of where we ultimately want to be, but we don't have to be there tomorrow. But just building 100 branches a year is a massive exercise.
- [10:12]
Tracy Alloway
Site selection, you're a construction company.
- [10:14]
Bill Demchak
Yes. I mean, exactly right. So you need to pick the right location. You need to choose whether you're going to do a drive through or you're going to be at the end of some shopping, something where you're kind of an end add on to a new development. The physical, you know, we have preset designs so we know what we're building. But you still need a contractor. You need somebody running at the physical plant that you move into the branch. We have pods now. New branch opens, truck with a pod shows up. And everything that that branch needs to run from computers to paper to pens is in a pod. Just deliver it right into the branch, which is what we're going to do when we do the first bank conversion. As an aside, that's really interesting. Yeah.
- [11:11]
Barclays Brief Announcer
Today's markets move fast. Get the insights you need in 10 minutes with the Barclays Brief, a new podcast from Barclays Investment Bank. Through sharp dialogue and scenario based analysis, our leading experts analyze key market themes each week. So whether you're managing a portfolio or leading a business, the Barclays Brief podcast can help you make smarter decisions today. Stay sharp, stay briefed. Find Barclays Brief. Wherever you get your podcasts.
- [11:41]
Tracy Alloway
Let's talk about bank regulation because I think this is fun. Yeah, go ahead. Very fun. This is part of the consolidation story, I think, is that even though post financial crisis there was more focus on the significant banks, the G sibs, at the same time those G sibs seem to have benefited from some of the regulation. Is that how you would characterize it?
- [12:04]
Bill Demchak
I don't know that they, I don't know if they benefited from regulation. They had to carry extra capital. They clearly, you know, in times of crisis have done better than the broad swath of smaller banks as we saw with Silicon Valley and some others. But they were sort of walled off from competitors. So, you know, I've talked for years about just the need to be able to compete. Some of that competition comes from M and A. Some of it just needs to, you know, the AB to do certain activities. And in theory now we're in an environment where it's easier to do that. And I think practically that's probably true. Although I would tell You I think we could have done large deals had we chosen to back during the Biden administration. I think people tend like one of the sound bites that comes out of regulators is good deals are okay, bad deals aren't. But they won't tell you what a bad deal is. But a good deal is typically when you have one good bank, somebody's in charge, you have technology that can actually absorb the other bank and you can protect consumers and so on and so forth. Those could have gotten done in the last administration.
- [13:09]
Joe Weisenthal
That's interesting. Well, let's talk about more about your philosophy of M and A because so your stock has done very well. But it has for a while, especially in the last year, up until recently had been underperforming some of the other banks. And you're like, quote is like everyone thinks we're going to do something like I don't know an exact quote, but it's like something. Why does everybody.
- [13:31]
Bill Demchak
The whole world's betting I'm stupid.
- [13:32]
Joe Weisenthal
Yeah, right. But so like, but then how do you grow so okay, all the market, they don't want to pay up your stock because they think that you're going to stupid business.
- [13:43]
Bill Demchak
This isn't complex. We'll just start with the basics.
- [13:45]
Joe Weisenthal
Yeah. All right.
- [13:46]
Bill Demchak
Last year we outperformed, I think everybody, including JP Morgan and top line revenue growth and EPS, PP&R growth was PPNR sorry, no pre provision net revenue.
- [14:03]
Joe Weisenthal
Okay, keep it.
- [14:04]
Bill Demchak
Fantastic year. We set records in new client acquisition, revenue growth, expense control, great new tech rollout and stuff. And we underperform. Part of the backdrop of that was the mega banks outperformed as people correctly thought regulation was going to drop and they could return more capital than they historically had. So take that bucket. They're doing great because they have all this capital and they're free to do whatever they want to. Smaller banks went up in value because, you know, people like Bill Demchak with the big mouth said there's going to be consolidation so everybody's going to buy them so they go up in value. And because we are a likely acquirer given our historical performance and being good at integration, we get crushed.
- [14:46]
Joe Weisenthal
Did you get penalized from the perception of a more liberal M and A?
- [14:51]
Bill Demchak
Absolutely. But it was part of. It's my fault. And you know, because I talked about, you know, I talk about the need for scale, I talk about the consolidation that's happening in retail, I talk about why this makes sense and people make this leap and therefore end the sentence with at any cost. And that's a Terrible assumption. Not at any cost. We can do this organically. It just takes longer. And you know, today with everything flying in value and us underperforming, it's extremely unlikely we find something that makes economic sense for us. Plus the fact, just as a side, the environment is so good right now, nobody, none of the reasonable sized banks want to sell. This is like a, this is like a sunny day in, in August, man. You got, you know, rates are going the right way, the curve is steepening out, credit's great, regulations coming down. Nobody sells their bank in that environment.
- [15:47]
Tracy Alloway
Do you wake up every morning and check the PNC share price? I always wonder about this. CEOs of public companies, you're graded instantaneously by the market.
- [15:57]
Bill Demchak
Yes, but the market at times is an unfair grader. So I don't pay attention to it. You know, when we, I look at metrics all the time. Are we winning clients? Are we automating things and getting more efficient? Are we, is our marketing campaign reaching people? What's our traction level in digital? You know, all these things that ultimately will lead to a share price performance, but not in the day.
- [16:23]
Joe Weisenthal
Well, let's talk then a little bit about. Okay, so a lot of banks are doing well. They don't, they're not, they don't want to sell.
- [16:30]
Bill Demchak
Yeah.
- [16:30]
Joe Weisenthal
You're not a stupid guy. So you don't want to make like a dumb deal. So then that, so there's not going to be deals. Okay. So yet you have this aspiration to one of the really big banks. And so, okay, that leaves organic growth. What is that?
- [16:45]
Bill Demchak
But it also, I mean, in perspective. Right. We're in this. The weird window in regulatory change isn't the Trump administration. It was the Biden administration. Anytime before Biden and now after Biden. Deals get done all the time. We're 165 years in business. You know the little chart you talked about with all the banks? Yeah. We've got to have 150 banks under us through time. And that'll continue. But it doesn't have to happen now. Right. The weird thing about now is just we ended the four years of strange period under Biden.
- [17:19]
Joe Weisenthal
Got it.
- [17:19]
Bill Demchak
Now we're just back to the old game. This will go for, you know, go on and on and on.
- [17:23]
Joe Weisenthal
So what is the essence of the organic growth strategy? To. If it's.
- [17:28]
Bill Demchak
Yeah.
- [17:29]
Joe Weisenthal
To grow.
- [17:30]
Bill Demchak
So so far I've been talking about retail. Let me talk about the reason for retail. So ultimate reason for retail is retail deposits. Retail deposits are low cost. They're sticky. They allow you to support your corporate community and consumers with loans. We've been able to win in what we call our cnib business of corporate institutional bank business. Gain share every year for the last, I don't know, 15 years. And what is a very fragmented market, you know, we talk about the mega banks gathering retail share, but in corporate commercial, nobody has any real share. It's shotgunned everywhere. And we win in that space. And we do it by going to market locally. We organize. This will all sound kind of silly, but we don't have P&Ls by product. We have P&Ls by client. We go into the market, we have a regional president. We have product expertise, and we choose the most important and impressive clients to cover in that market, not anybody else. We don't do business with somebody necessarily who walks through the door because that's all that we'll do business with. We'll call on the same grade A client, you know, that, you know, you want to cover. If you're in Miami or you're in Texas, we'll call on them for 10 years until they call us back. Patience, persistence, consistency, good product ideas. Our real low banker turnover, and we win. And you just, you know, rinse and repeat, go into new markets, add people.
- [19:03]
Tracy Alloway
Keep growing just on acquisitions. I'm really curious how difficult it is to integrate acquisitions, another bank with your company. Because you just said you're good at integration. What does that actually entail?
- [19:15]
Bill Demchak
That's a great question. So integration. There's a mechanical component, and then of course, there's a cultural component. Mechanical component should otherwise be easy, but is proven difficult for some people over time. The mechanical component. Let's just talk about First Bank. For us, we simply take all of their data records so, you know, record field data items for one of their checking accounts, and we import that data, but we don't import that application. All that data comes into pnc, and then over a weekend, we simply open up a million new accounts on our existing products and services. Sounds pretty simple. If you can move the data, you can just effectively open new accounts. My team will scream, it's not that easy. But that's basically what you do.
- [20:02]
Joe Weisenthal
Looks easy to you.
- [20:03]
Bill Demchak
Yeah. Now all of a sudden, okay, now we have all these customers with new accounts. How do they log in? How do they learn? Like, our online is different than somebody else's online. So now you're getting into training modules, communications with clients, training their branches with First Bank. Tremendous frontline set of people, incredible bank and history. We're keeping all their client facing employees, now they all of a sudden have to know the difference between PNC products and their old products. So how do we do that? That's what integration ultimately means. There's a mechanical piece of it, get the systems to work. So you turn it on and lights go on. There's delivering pods to the branches. So they have all the PNC equipment and the signage and all that other stuff. But there's a lot of time with people. We send in branch buddies. So we'll take branch managers from all around the country and go have them spend a couple weeks in each of sitting with the branches at First Bank.
- [20:57]
Tracy Alloway
That's just helpful aspect of integration and.
- [21:00]
Bill Demchak
The learning and it's. I mean, banking, you know, in some ways is simple. In some ways it's wildly complex. An employee in a branch, the problems that you might walk in, right? You say, oh, I rarely go into a branch or I don't think about it. But when you go into a branch, something's really busted. Yeah. So the employees. So the employees, right, they need to know how to fix it. And that's when we say we're good at integrations. It's because we focus on making sure that our new teammates know how to do their job and can help their clients. Because they have the same clients they've had forever. They don't want to look bad in their new role.
- [21:39]
Joe Weisenthal
Can you actually just talk more about that? So it's like, okay, they need to know how to like sell or be familiar with the PNC product. Now, like talk a little bit more about like what that difference is, what actually changes functionally. Why wouldn't be what it is about either culture or products such that it's not just just replacing the logo and the pens and the note.
- [22:00]
Bill Demchak
Well, everything works at the margin, slightly different. I mean, checking account's a checking account. But imagine you're in a branch or you're in the care center. You have a problem, you made your car payment, you sent it through snail. It was timestamped the right time, but it went through snail. Mail got lost, you got penalized a fee. And you go into the branch and you say, it's really not fair. I sent this and you're hitting me with a fee. And the branch person, what do they do? Right. There's some answer to that. What's our procedure? Well, now with AI, you can just go into a large language model that is built off of all of our customer service protocols and say, what do I do? This just happened. It'll tell you credit the customer the fee and send a note to the whatever the answer is for that particular problem. But the person sitting there needs to know which system do I query, what's my browser, who do I talk to? You know, if I'm going to make an exception, do I go to the branch manager or can we do that here or do I get to call somebody in some strange room in a back office in Philadelphia? All of that with us because we automate so much of it is now sort of query and self learning in the branch and then importantly more and more with our customer self curing, you know, they get locked out, you know, just, just be able to fix the problem yourself.
- [23:17]
Tracy Alloway
One thing I've wondered for a few years, does local expertise matter anymore when it comes to actual underwriting writing either in retail or commercial? Because I think most of America used to have this very romanticized notion of the banks. The sort of it's a wonderful life model where your branch manager knows you and knows your entire life and business and all of that. My sense is that doesn't exist so much anymore. But tell me if I'm wrong.
- [23:46]
Bill Demchak
You're wrong.
- [23:46]
Tracy Alloway
Okay.
- [23:49]
Bill Demchak
It's harder to accomplish when you become a larger bank. But you know, how is credit evolved through time? Consumers. Consumers now if they're an existing client of you are scored based on their cash flows that you see. So not a FICO score you can actually see when did somebody pay the rent? Are their spending patterns predictable? You can build models to say, you know what? This person is a really diligent good credit. Even though it might not show up in a FICO local market business. You're going to lend to this small developer, you're going to lend to this store on the corner. Branches really matter and local bankers matter for small businesses because they see where the foot traffic is. They know the reputation of the person who's running that business. Do people, you know, are they a community influencer in a good way where they're, you know, people want to support them, all that stuff still matters and all that stuff. The more you can give somebody voice locally in the decision. I always kind of call it putting a thumb on the scale a little bit on a yes or no that's otherwise mechanical, the better your credit underwriting is.
- [24:54]
Joe Weisenthal
Well, since we're talking about consumer credit, what happens to America or the industry if there's a 10% cap on credit card rates as President Trump has proposed?
- [25:03]
Bill Demchak
So the only thing I know for sure if that happens is that all the credit card businesses in a country lose money if run exactly the way they are today. So we have credit card business. I get swipe fees. I give most of those away with rewards. I earn credit when somebody is revolving a balance. I lend credit when somebody pays it at the end of the month. I'm fronting that money for you if you clear your account every month. But hopefully I'm getting some swipe fees to make that good. After all that, you charge interest rates, you have losses and you get a margin. Maybe you make 4% and assume interest rate. I'm making up numbers here, but assume maybe the average rate is 18%. I make four at the bottom. Now I'm going to take my 18, I'm going to drop it to 10. Oh, I just made minus four. And so all that math is going to come out, which is why I don't think this goes like, there's almost no way this can happen. You'll just simply shut down consumer credit in the US they can't force. They could say the cap is 10% and I'll say, fine, I'm out. Like, why would I do it if I'm going to lose 4% a year on that? Something's going to change. Fees are going to go up, lines are going to get cut, rewards will go away, you know, and something will emerge out of the dust. But it's not going to look at all like it does today.
- [26:19]
Tracy Alloway
What do you think the genesis of the proposal or the rationale behind it actually is? If, you know, everyone in the industry says this basically ends credit cards.
- [26:28]
Bill Demchak
Yeah, I think, because first of all, the emotional appeal of it. I mean, it sounds absurd that you're charging somebody 18% for a revolving credit. I think that sounds high. That happens to be the rate that you need to charge to make money. But it sounds. Which is why I never revolve a balance. I pay it off every month. So there's this emotional appeal. Geez, you ought to be able to lend. Like, I'll lend money to you at 10%. I'll lend money to you at 10%.
- [26:53]
Tracy Alloway
Thanks.
- [26:53]
Bill Demchak
Right. But I can't necessarily figure out who you are. In a sea of people. There's a bunch of people, I'll lend money at 4% because they'll never depaul. That's the issue when you try to get to the broader population and extend credit to the consumer. That drives our economy. Science isn't so exact to say you get nine and you're 22. I don't know about you.
- [27:15]
Joe Weisenthal
Well, actually I want to press this further because intuitively I would think you'd be able to do that. You just mentioned the fact that you have granular access to propensity to pay back. That is not even captured by psycho. You have incredible amounts of data and predictive capacity on the difference between whether me or Tracy are going to evolve. So when someone says 18% seems high.
- [27:41]
Bill Demchak
Yeah.
- [27:41]
Joe Weisenthal
Are we supposed to just like believe? Oh, just trust me, it's high. This is what I need to charge in order to make money in this business. I mean, I could trust you, but like how would you.
- [27:50]
Bill Demchak
But the math is the math.
- [27:51]
Joe Weisenthal
Okay.
- [27:51]
Bill Demchak
The end result, right. You say when you run your models and you look at propensity to pay you back, you basically, whether you're looking at FICO or anything, FICO is only as good as whether that person has a job next week. You can look at predictability and yes, this person has been paying their rent. They have a steady expenditure thing on food and on gas and on entertainment and they're savings account balances always stay pretty steady. That ought to be a good credit. Well, it isn't a good credit if they get fired or lose their job because the economy's in a downturn and all of a sudden, well, I thought that was a really good credit. I should charge 5%. Turns out I just wrote the whole thing off because there's no recovery value in that credit. That's where the science fails. There's exogenous variables you can't model. And the wider you cast the net. Right. The bigger the dispersion on outcomes. However, if we've settled there, that interest rate kind of sets a reasonable profit margin. The largest card issuer in the country. You can figure out who this is, right? Best at it. Best computer models Best finding credit. Best extending credit to non prime borrowers. They trade at one times book value. If this was a genius business like that's way too much. I dropped the rate by 1%, you know, and grow share. The problem is it's not so great.
- [29:22]
Tracy Alloway
Actually, I want to talk about private credit a little bit because obviously this is an area where we always hear about banks face new competition from middle market lenders and all of that. But at the same time we also see banks teaming up with private credit now and it seems we have also. Yeah, okay, talk us through that relationship.
- [29:44]
Bill Demchak
Yeah. So traditionally standalone high yield credit, if all you did was walk around and just lend money with no particular expertise but across, you know, leverage clients at a single big credit That's a really lousy return on capital. Right. You know, all the science going back to when Moody started tracking this stuff in the 80s, you get kind of a 35% recovery. You have a 10% default rate. You go through cycles, sometimes a lot worse, sometimes a lot better. It's not a particularly good business, becomes a better business, and sometimes a fantastic business. If you couple that with the wallet that goes with that company beyond just the credit. So IPOs, M&A fees, bond feel, whatever the stuff is that goes along with it, all of a sudden it becomes a pretty good business. What's happened in the last couple years? We've seen this drift into more and more credit, leaving banks, going into private equity and other alternative forms. At pnc, it manifested itself where we'd have a client that we might have banked for 100 years, owned by third generation family that just got sold to private equity and our client's gone because I don't want to make that loan at that leverage ratio. And whoever does make the loan is going to demand the treasury management relationship and all the other stuff that goes with that client. So where we come out at it is I don't know that I necessarily want to make the loan. I will sometimes, but I want to keep the relationship. So our partnership with TCW is an example is when that happens now we, you know, we put capital in the TCW fund, as did a bunch of other people. But happens now, we'll keep the client, you know, we'll diversify the credit risk but keep the fees. So the return on equity on that, this thing goes way up, the whole notion. Remember private credit in the last three years? Oh my God. It's a new, new thing. We're great at it. We're going to make you a fortune. Why is that? Private equity kind of hit the skids. Nothing was getting sold. They need to raise new money. We haven't had defaults in 10 years. So a manager shows up and says, look at my track record, I can earn with two times leverage. I'll give you 10% return after fees. This is fantastic. Private equity sucks. Come with me. Of course, we haven't had a credit cycle in 10 years. So those stats are all garbage.
- [32:08]
Joe Weisenthal
Yeah.
- [32:09]
Bill Demchak
You know, actually go through a credit cycle and you have two times leverage on that thing and you start having defaults, which we've had a few of. All of a sudden, it's not really exciting.
- [32:32]
Tracy Alloway
Can I ask one macro question in this conversation, please? Which is, where do you think we are in the Credit cycle at the.
- [32:37]
Bill Demchak
Moment, I've given up trying to predict it. Credit today is pretty good. Better than pretty good. A lot of the leverage that's in this system that everybody complains about are actually with things that are very good enterprise value. So I don't worry so much about the disappearance of a company. I think about it in terms of reallocation of the ownership structure, right. If they're over levered, they go down. Either private equity firm bails them out or they say, no, here are the keys. And now the debt holder owns them and then the debt holder restructures the debt and sells them again. Somebody lost money, but the company's still a good company. It was just over levered to go most of the noise you're hearing right now on credit. Beyond the fraud, you know, the cockroaches that Jamie said come up when things get stretched. Most of it are decent enterprises just over levered. And then of course you have the fraud. You haven't had anything that's really going down today because the economy just crashed on a spot other than some isolated issues with tariffs.
- [33:37]
Joe Weisenthal
There is a cyclical element to fraud, right? Because in good times people look the other way.
- [33:43]
Bill Demchak
And I don't, I don't think it's cyclical. I think it's always there. I just think, you know, the, who has it said, you know, when the water goes out, you can figure out who's swimming nude. I think it was Buffet. It was Buffett.
- [33:56]
Joe Weisenthal
Yeah.
- [33:56]
Bill Demchak
Yeah.
- [33:57]
Joe Weisenthal
Well, Galbraith, however, talked about the bezel, right? The, the, the, the, the propensity of flim, flams and scams to exist during the good times. And people just like don't. And that accumulates and accumulates and that could, we've had like 20 years, as you said, like we haven't had a credit cycle. I mean we're, it's almost 20 years since the financial crisis that, yeah, the.
- [34:18]
Bill Demchak
Finance always finds this way. It finds a way to blow itself up. I mean it's, it's, I mean it does, you know, it's, it's not a opinion. You just look at history. I, I think what happens is you get, you get, you know, we find good things and then you write them and you, yeah. In every instance where something's gone wrong, you just keep pushing on something until you take it over the edge. Right. Finance is an industry where historically you can make a lot of money at it, right. You're playing with other people's money. You know, pennies and nickels come off of other people's money. I'm just going to keep pushing. I'm going to keep pushing and keep pushing. When it finally falls, it falls hard. We haven't had that. What's the new, new thing now? It's fintech and it's crypto and it's, you know, banking has been kind of throttled by regulation for 10 years.
- [35:09]
Tracy Alloway
Well, speaking of finance always finding a way to blow itself up, can we talk about Silicon Valley bank and 2023? Because, you know, they managed to blow themselves up for a variety of reasons, but one of them was they just had too many bonds, which is kind of, you know, an unusual one. What was that experience like for you? First of all.
- [35:31]
Bill Demchak
Let'S go back to Silicon Valley. I actually think they had a great institution.
- [35:36]
Joe Weisenthal
Who's been saying that, who's been saying that many times on this podcast, The Silicon Valley bank respecters. Okay, keep going.
- [35:43]
Bill Demchak
No, it's just, it was a unique business model with a very loyal client base that they.
- [35:50]
Tracy Alloway
Not that loyal in that.
- [35:51]
Bill Demchak
No, I mean, look, you know, if you're dying, loyalty goes out the window. But they blew themselves up in something that was not at all core to their basic business. Right. Interest rates are super low. They got as long by some calculations as, like, Long Term Capital was back in the 90s. I mean, they were really, really levered and underestimated the negative convexity deposits. Right. You think, you know, on average through the cycle, they're going to be there seven years, Oops, they're gone tomorrow. And so they just, they blew themselves up on rates that had nothing to do with their core competence or what they were as a franchise. And it's, it's unfortunate. It was a rookie mistake. There was nothing. That's just a crazy position to be in.
- [36:31]
Joe Weisenthal
How scary. You know, those, those days afterwards. And then people started hunting for like, any, any bank that had the word California in the name. Like people were shorting it or people.
- [36:42]
Bill Demchak
Or, you know, you had headlines where, you know, the regional Bank Index. The Regional Bank Index, why? I'm a national bank. We are not a regional bank. Because the next time they put regional bank headlines in there, I don't want to be associated.
- [36:53]
Joe Weisenthal
Yeah, I get it.
- [36:54]
Bill Demchak
No, we actually benefited during that. You know, we're a safe haven and we actually gathered deposits and opened thousands of new accounts during that period of time. And then every day somebody would flash the Regional bank index and we'd get blasted on our valuation, which is fine. It always, you know, valuations are short term. It all Came ripping back after that.
- [37:15]
Tracy Alloway
So one of the issues that came up during the 2023 banking drama I guess is the discount window and banks reluctance collectively to use it. And this is something that the Fed's been trying to change. Right. And actually do you remember in late 2022 there was a big spike in tapping usage of the discount window. And it turned out that wasn't any of the banks that like ended up getting into trouble. It was Beal bank down in Texas.
- [37:43]
Joe Weisenthal
Which is a weird bank.
- [37:44]
Tracy Alloway
Yeah, it's a very weird bank. But anyway, regulators trying to get banks to use the discount window more, feel more comfortable with it. How do you feel about it?
- [37:55]
Bill Demchak
Well that's a great question. So before the financial crisis and before regulation and LCR and long term debt proposals and all that other stuff, there was a very active fed funds market. So in a given day the excess reserve a bank would hold deposited in its Fed account was tiny. And we would trade fed funds around with each other. If I needed 2 billion, you'd give me 2 billion. Next day I might give you 2 billion. Like big size Fed fund positions. And that's how you balance your books at the end of every night. And then they come out and they say hang on, we don't want you doing that anymore. There's an LCR requirement. You have to have this much liquidity stuck aside. Instead of going into the fed funds market that gave rise to all these excess reserves, Fed fund market is basically dead. The Fed sets that rate, nobody trades on that rate. It's as dead as Libor. It's gone. I don't even know why they talk about it anymore. Now you have, they basically said to you, don't use the discount window and hold all this cash. You just froze the economy because you stopped the circulation of, of of capital transformation. Home loan banks step in because I have to hold all of these Treasuries and mortgage securities. I can pledge them to home loan and they'll lend me money at pretty good rate. So that's going to be my outlet. I'm going to go to home loan and I'm just going to borrow there at a pretty good rate or I'm going to repo my Treasuries that I hold. Silicon Valley happens. And they had home loan lines, they didn't have any discount window lines. Now the discount window will lend against Treasuries and agencies pretty simply because it's basically settled electronically through effectively the Fed wire system. If you're pledging loans, it's really hard to pledge. So if all I have is securities to pledge, I should just repo them or I'll give them to the home loan bank. Discount window will do more than that. But if I want to draw against my loan balance, I need to give them physical wet signature loan docs in a vault, guarded, audited, 24 hours a day. Like there's gotta be a guard. And I have wet signatures stacked up so they know that when I draw against that loan, I actually have that loan. Because it doesn't settle Fedwire like a bond does. This is a loan, right? I lent you money, you sign the thing, I put it in the drawer somewhere. Then you say, all right, let's pre position these loans. We spent PNC spent millions and millions and millions of dollars. So the vast majority of our CNI loans are now at the discount window. We don't borrow on them, but they're there if we wanted to borrow under them. I got a call, it's gotten a little better. But basically like during COVID you know, or post Covid when nobody was coming in the office, you'd call like the way you borrow from these companies, you call Cleveland, there are, there are fed 12th district and then they say, oh, okay, yes, you're in good shape. We'll allow Washington to allow you to use the discount window and then they'll call Washington and then maybe like a day or so later you can have money. When nobody was coming into the office, nobody would answer the phone. I gotta draw in the discount window. That just rings. Nobody's there. God, there's no system. It's not like I can type in and draw. It's not like I can do a fed funds trade through a broker and draw the money. It's unusable.
- [41:16]
Tracy Alloway
But now you're pre positioned to borrow against loans if you need to.
- [41:21]
Bill Demchak
Yeah, we have enough liquidity on hand basically to cover anything that can happen because we positioned all of our collateral and the optimal spots.
- [41:30]
Joe Weisenthal
Plus this is what I was gonna. Are you talking about physical spots when you say you position? Because you're talking about like wet signature documents.
- [41:37]
Bill Demchak
Yeah, so the only place you can borrow against CNI loans in effect is the discount window. So, okay, so they're gonna go over there. That's what signature. I can borrow against securities in the repo market at the home loan or the Fed. So this is kind of the confusion that happened. Where was stuff pledged with Silicon valley? I have 50 billion of cash sitting on the Fed's excess reserve book. So that's instant liquidity. And I own a whole bunch of Treasuries that I can sell if I had to. So you figure out how do I optimally earn whatever I can on these assets. I'm pre positioning but get them in the right place. So if I need liquidity in an emergency, I can get it. Silicon Valley did not do that and the Fed did not make it easy for them to do that.
- [42:25]
Joe Weisenthal
And I'm just trying to be clear. When you say get them in the right place, you mean like a physical place?
- [42:30]
Bill Demchak
Some of it's physical, like the loans, the wet signature loans. I literally think we take them down to like a vault and spin a dial, you know, with the big, the big crank and they get locked in there. But no securities by Cusip, you would say like this batch of Cusips is pre positioned with the Fed. So I just know where they are. I know the balances, I know I can send them right over Fed wire and draw on that. So it's, it's, it's that thing. Yeah.
- [42:53]
Tracy Alloway
One thing I always wondered with the discount window. So part of the reluctance historically to tap it on the part of banks has been they're worried it'll get out into the market.
- [43:02]
Bill Demchak
Right.
- [43:03]
Tracy Alloway
And there'll be rumors that they're tapping the market. How does that actually happen? I don't understand how that info leaks.
- [43:10]
Bill Demchak
So in theory, because let's imagine somebody drew on the Fed. So the discount window is regional Fed. Let's assume somebody took down 100 billion from the, or even 20 billion from the discount window through the Cleveland Fed. It can only be PNC so that people can figure out who it is. So why are you doing that? And then I got a story and I got to explain it where I think this should go. So go back to the original where I said Fed funds is dead, nobody trades it. We ought to just trade the discount window. Right. The discount rate ought to be, I'm just lending and borrowing all day long. I can leave money, excess reserves if I have money to give and I can borrow money discount window when I need money. And there ought to be like a 5 basis point bid offer on that. You'd put more liquidity into the system here to grow the economy. If you did that in a great way. But think they wiped out Libor, they wiped out Fed funds through all their lcr. Now you have the discount rate. Just bid offer on the discount rate and then all of a sudden discount window becomes right way transaction. It's happening everywhere.
- [44:12]
Tracy Alloway
Yeah. The stigma goes away.
- [44:13]
Bill Demchak
Yeah.
- [44:14]
Joe Weisenthal
So you have to forgive me because there's a lot going on in the world these days, so I can't pay attention to everything. I have no idea where you stand on yield bearing stablecoins, which I understand to be a big thing of debate in the sector. And again, I've been paying attention to other things, but I see headlines about this pop up.
- [44:36]
Bill Demchak
Yeah, so stablecoin legislation, genius act comes out. They left a little loophole in there. They said no interest, but it kind of got run around by offering rewards, promos, same thing. Clarity act is what's being debated right now. They're trying to close that loophole. They being kind of banks and people around banks keeping the loophole open is crypto. Why not? If you could pay interest, it's going to drive volume. I want to pay interest. Banks say, I don't want you to pay interest because you're going to potentially suck deposits out of the system and you're messing around with a capital system that's worked for 250 years. You sure you want to mess with it? At the end of the day, I think the following. Stablecoin has been built, launched, marketed as a payment mechanism. It's somehow, by the way, I'm not sure it will, but it's going to make payments easier, faster, cheaper, whatever. Not as an investment vehicle. An investment vehicle is a different animal and needs different regulations. So all of a sudden, like a stablecoin that's buying t bills, that pays you interest, that looks an awful lot like a money fund to me. And that's fine. If it's a money fund, then regulate it like a money fund. Can't break the buck. You got to have this much liquidity on hand, you know, all the disclosure rules that go around with it. Then do what you want with it. You know, go ahead and pay people in money funds. I just think they're mixing things and I think, you know, my, my uninformed worry is we're not done blowing up in crypto yet. Right. It's in fits and starts as you learn these things. Why do we need to start everything at once? Let's figure some stuff out. If it works and there's a logic to doing it, then go ahead and do it later. I don't know that you need to do it all at once.
- [46:24]
Joe Weisenthal
What's the rush?
- [46:25]
Tracy Alloway
Yeah, you know, we are coming up to the super bowl and when I think of the super bowl we're not in, I always think of the basel endgame proposals and that ad that they ran in 2024.
- [46:39]
Joe Weisenthal
It was surreal, wasn't it?
- [46:41]
Tracy Alloway
It was a very effective marketing tool, at least for me. And we are expecting a re proposal of the endgame. What's your sense of what might change between the original document or suggestions versus now?
- [46:56]
Bill Demchak
I have no inside information on that, but the original proposal that was written was in contempt of math. They basically, they had a goal of raising capital and then they used bad math to cause that outcome, which was a lot of what the outrage was over because if you start making up rules and capital allocation, you inadvertently cause risk to emerge in places that shouldn't. So I think the math is fixed. The lawsuit on the stress test and the fact the models need to be public. So the math is going to be a lot better on what they measure. You've heard about indexing G SIB scores to inflation and some of the boundaries. I don't know what they're going to do in operated risk capital. It's been a fight. I think they're going to give some credit on credit risk ratings that Europe gives that we don't. And my guess is there'll be something in there for everybody and then everybody will collectively be disappointed about something. They're not going to give away the shop, but they're going to try to make it directionally correct and based on real math instead of made up stuff.
- [48:07]
Joe Weisenthal
I want to go back to something you said about the bank integration and you actually gave a very rare, I would say actual 2026 application of generative AI implementation where you mentioned that the person at the local bank branch can actually like ask a question about the policies and learn. So is that that wasn't just a hypothetical, that's a real thing that's happening right now.
- [48:31]
Bill Demchak
Yeah, that's true.
- [48:31]
Joe Weisenthal
Can you talk? We. This is a theme that's been, we've been talking about on the podcast lately, which is, you know, not just AI per se or implementing or we're going to like implement AI, but like, you know, the changing relationship between a company and their software vendors and, you know, does AI change some of these relationships? Do you have leverage? Because there are certain, like niche functions that you could like build yourself. Can you talk a little bit about how you're seeing some of these things play out within your firm?
- [49:00]
Bill Demchak
Yeah. This is fun because there's so much bad information out there about that. So start with the basics. In order to utilize AI, you need clean data, defined data with a single source of truth. We've spent 10 years doing that in a fortune. So you know Silly as that sounds, think how many different places inside of a company you might have, you know, a checking account balance that's then morphed into the average checking account balance over seven days, or the median or the this or the that. And so when someone's trying to pull data to run a report or build a model, they don't even know what the real. They don't even know what they're pulling. So you got to get it clean at the base source and an index. Now you have the capacity to build a model, whether it's large language or analytical. Large language models, there's open models out there you can just use, which is what we tend to do to build our document sorting. We're using it on our own data, our own documents. I don't need their data and I don't need to retrain their model per se, other than running it on my own data, which is this much smaller compute factory. I don't have the whole Internet down to download it. I just got this thing right. And then once we train the model, running the model doesn't take a lot of compute. Training the model takes a lot of compute. When we implement. Talk about AI, some of it's the, the fancy object thing, oh, I'm going to implement Copilot and now people can write emails for me. Everybody knows when Copilot wrote my email because it's way too polite and the punctuation is correct. Does that make us any money? Probably not, you know, but it's cool. And yeah, that's. So when you hear most people saying, oh, we're using AI, they just plugged in copilot and paid somebody 20 million bucks a year for licenses. Where it starts to make a difference is when it can answer questions in a hurry for our employees or our clients and where it can automate process the same way. We've been on this automation journey for 20 years now, right? Starting with Internet and then kind of microservices and applications. AI is just the next stage of that. You know, we've got, we over the last 10 years probably get 30 points of productivity efficiency in our operating environments. Probably last seven years, actually. AI is going to give us another 30 and it's going to come through time. But it's think of it as automation. All it is, even when people talk about AI, they'll say, oh, you know, it's an AI model. It's not an AI model. It's just a decision tree. You know, it's automating a script and an answer Moving data in a way where somebody doesn't have to swivel. You know, pretty basic stuff.
- [51:37]
Tracy Alloway
What about on underwriting? Would you use AI to automate that particular process?
- [51:42]
Bill Demchak
It's actually not legally allowed today. So there, there's, I mean, it's truth in lending or something. You know, one of these laws where if I tell you no, you applied for your credit card. They just capped my rates at 10%. So I said no. I've got to give you the three reasons of why I said no. With an AI model, we look at a thousand variables, and the weight of each of those variables is dependent upon their interaction in your particular profile. So the weight of rent might be very heavy for one person and not for another. Based on the profile. I can't give you three reasons. The model told me no. The model told me yes. So what ends up happening today in credit decisions? This is crazy, but it works, is we'll set with our normal criteria, this fico, this debt to income, whatever else you look at, we'll say yes or no. And then if we tell you no, we'll use AI to try to tell you yes. Because I can still use my original excuses no. But if I turn, you say yes after the fact. You're not mad at me. So the point is, it's crazy, but.
- [52:53]
Joe Weisenthal
The point is that legally speaking, if you say no, you have to be able to articulate a reason.
- [52:59]
Bill Demchak
Yeah. So what ends up happening is everybody sets this bar way too high. This is one of these silly rules that needs to be looked at. I mean, we, we do use. It's not so much AI. There's a lot of decision tree models on automation that help with underwriting, but it's not necessarily a machine learning application, Tracy.
- [53:19]
Joe Weisenthal
And I mean, I, I find I get this idea of like AI as another form of workflow automation. Very intuitive.
- [53:25]
Bill Demchak
Yes.
- [53:26]
Joe Weisenthal
Tr, I used to publish transcripts of the podcast, but it was a very labor intensive process to like clean it up, et cetera. And so I thought like AI was going to be the panacea. It's like clean this text. It just, when we were doing it, it wasn't there yet. It was like creating fake, it was creating sentences that weren't there. But I understand this intuition that AI can then be like, trained on a repeatable process right now. And again, the things that we call AI, which these days, large language models, those workflow automations, like, are there certain workflow automations that today workflow processes that you could say we've been able to automate them in a way we couldn't have five years ago.
- [54:05]
Bill Demchak
Oh, absolutely. But let me just give you kind of some scope and some numbers and what's actually happening. And we have a pretty clean tech stack. So maybe we're a little further ahead at this than some. But we have, we focused on a billion 4 of addressable spend inside of our care centers and our operating environments. This is just solving problems for customers. Moving loan, all that stuff. A billion four we spend. We've come up with 171 different ways to use AI in reducing that spend. And the addressable piece of the billion four we think is probably 40% of it. Of the 171 use cases we prioritize five that are live. And so what is, you know, what does one of those look like, for example? So imagine inside of our wealth business, you know, we got a bunch of trust lawyers. So my grandfather, it's actually with P and C. My grandfather created this small little trust skip generations. And it's written, it's beautiful. It's handwritten on like three pages. Maybe it was my great grandfather. Some lawyer every month has to look at that thing and say, you know, this qualifies or doesn't or we're going to do this distribution. All of those things are manual. Now just read them into the document writer and all of the things that are mechanical outcomes from those millions of pages of trust documents are right in front of you. Right? Payment on this date. Here are the beneficiaries. It just makes it real simple. So document reading, expression of what's in documents on the basic stuff. You know, now I don't have to just go and search and find and human error. That stuff will make a difference. I worry with too much focus on the cool fun toy chatgpt. I mean this is, you know, it's a new Google search. It's cool. Give me the answer that isn't going to make the world better. If that's all it's used for, how.
- [55:59]
Tracy Alloway
Did you get a clean tech stack? Because this is something that also goes hand in hand with bank consolidation. You always hear that, you know, banks end up with this tangled mess of technological systems. Maybe some that include cobble or like old languages and things like that. Cobol, Cobalt never.
- [56:16]
Bill Demchak
You can't even. Yeah, you weren't even born yet when we were programming in cobol. So how did we do that? So honest answer. Right in the middle of the financial crisis, right. We merged with National City under duress from both firms. Kind of a regulatory wedding Neither of us had the capacity to run a larger firm. I mean, I distinctly remember, you know, talking to the combined organization. We have to rethink how we run something you can't manage by walking around anymore. And neither tech stack could survive on its own. And so we saved less money than we said we would in the announcement, or actually we saved what we said we would save. But quietly, we reinvested 2 billion bucks a year for 10 years. Wow. Yeah. So literally all new. We went from single server stack. So this computer runs that application. And each computer is different because whoever the application owner was went to dinner with Dell that day or HP the next day. We had 11 data centers. None of it was in a virtual environment. So building our own first cloud environment and then secondly writing everything in cloud language in a microservice application. So it's cloud native. That's forever. But we spent a ton of dough and just have invested, invested, invested, and got to a place where our tech stack is as modern as any fintech. You'll find out there.
- [57:51]
Joe Weisenthal
All right, well, this is fun. This is a lot of fun. Thank you so much for taking the time. We had a lot of.
- [57:56]
Bill Demchak
Thank you for being interested.
- [57:58]
Joe Weisenthal
Yeah, that was great. That was great. Really appreciate you coming out in oddlass.
- [58:01]
Bill Demchak
Good to be here. Thank you.
- [58:14]
Joe Weisenthal
Tracy. I really enjoyed that conversation. I learned a lot about banking in that conversation. We hit a lot in that. But I just wanted to keep going. There were so many interesting angles.
- [58:24]
Tracy Alloway
Bill actually answered the questions, which cannot.
- [58:27]
Joe Weisenthal
Be said for every CEO. No, I would say most of our guests are very good at answering questions. Not every CEO is great at always answering questions. But I was like, oh, I'm like learning something with each one of these things. Let's keep going.
- [58:38]
Tracy Alloway
Also, genuinely, he seemed to have a good handle on like the granular, practical aspects of running a bank. So I was really interested to hear how they redesigned their tech after the financial crisis. I guess they got a head start on everyone else. And then also the pre positioning of collateral at the discount window. I KN that the Fed had been encouraging banks to do it. I did not realize that you had to send the actual mortgage docs if you want to borrow against those.
- [59:07]
Joe Weisenthal
It is crazy how much is not just done automatically electronically.
- [59:13]
Bill Demchak
Right.
- [59:13]
Joe Weisenthal
And here was. I didn't ask it, but I was going to ask. Does blockchain solve this question? But the idea that like, okay, all of these things really are electronic ish, although there's clearly this physical component. But the idea that here is something which is theoretically Monetizable, which has liquid value, is a liquid instrument, but because of the way that the system is structured, cannot actually be liquidated or turned into liquid assets immediately if it had it or not, pre positioned, et cetera. That actually does still seem a little bit wild to me that that is the case.
- [59:51]
Tracy Alloway
I always thought that mortgage assignations were like one use case for blockchain.
- [59:56]
Joe Weisenthal
Right?
- [59:56]
Bill Demchak
Yeah, yeah.
- [59:57]
Tracy Alloway
Ye reasonably see blockchain, you know, helping out with that problem versus, I don't know, tracking the origins of lettuce and things like that always seem kind of ridiculous.
- [60:06]
Joe Weisenthal
Well, it seems like one of these things which is in banking and again is like integrated databases. So there's like it'll be a central bank database, there will be a home loan bank database and the regional bank and the bank database. Right. And the question is like why can't they just all see.
- [60:24]
Tracy Alloway
Talk to each other.
- [60:24]
Joe Weisenthal
Yeah. Or see the relevant parts of the database.
- [60:27]
Bill Demchak
Right.
- [60:27]
Joe Weisenthal
And. And I suppose that's easier said than done. I really like hearing him talk too about practical applications of AI, which again maybe feels a little different than some of our conversations last year. It feels like now there's more articulated examples of this is a sort of labor saving or time saving technology. So that's another thing I think we have to pay more attention to in 2026.
- [60:51]
Tracy Alloway
Also, the database issue in the context of AI is kind of interesting because we were talking about how so much of programming nowadays, so much of the tech issues are those coordination problems. Right. And so even if we have something like Claude, we recorded that episode recently, even if you have Claude writing software, it doesn't necessarily solve that coordination issue totally.
- [61:17]
Joe Weisenthal
And then you know, bank branches, how crucial they are.
- [61:21]
Tracy Alloway
That's surprising.
- [61:22]
Joe Weisenthal
I had heard that, you know, there's again, it may be just like one of those sort of of things people say. Like people are less likely to switch banks than they are to get a divorce. And so therefore it still makes sense to build out a physical branch. But like the strategy of that and thinking about where and how, the fact that they're building hundreds of branches still, even if the total number of bank branches is actually declining, that's just like a super interesting real part of the business.
- [61:50]
Tracy Alloway
It is true that I've had the same bank since college. I don't know about you and I hate them and I still won't leave.
- [61:57]
Joe Weisenthal
But since I moved to New. Well, have I. Yeah, since I moved to New York, I think I've had. So that's 21 years. So basically, yeah.
- [62:04]
Bill Demchak
One bang.
- [62:05]
Joe Weisenthal
It's kind of wild.
- [62:05]
Tracy Alloway
I'm going to switch. I'm going to prove the anecdote wrong.
- [62:09]
Joe Weisenthal
They're just going to switch for the hell of it.
- [62:10]
Tracy Alloway
Yeah, absolutely. Okay. Shall we leave it there?
- [62:13]
Joe Weisenthal
Yeah, let's leave it there.
- [62:14]
Tracy Alloway
This has been another episode of the Odd Thoughts podcast. I'm Tracy Alloway. You can follow me, Tracy Alloway.
- [62:19]
Joe Weisenthal
And I'm Joe Weisenthal. You can follow me. Hestalworld. Follow our producers, Carmen Rodriguez at carmenarmandasho Bennett at Dashbot and Kale Brooks at Kalebrooks. And for more Odd Laws content, go to bloomberg.com oddlots or the Daily newsletter and all of our episodes and you can chat about all of these topics 24. 7 in our Discord, Discord, GG Oddlots.
- [62:40]
Tracy Alloway
And if you enjoy Odd Lots, if you like it when we look into the business models of banks, then please leave us a positive review on your favorite podcast platform platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad free. All you need to do is find the Bloomberg Channel on Apple podcast and follow the instructions there. Thanks for listening.
- [63:14]
Bill Demchak
Sam.