We're heading toward a monetary world where the gap between universal banks and the new generation of banks is going to become enormous. The bundle that makes up the deposit franchise (whether because of ignorance about how credit expansion works, or because of shifts in consumer habits) no longer justifies how slow and poorly remunerated money is inside the banking system. As a result, the generation of comfortable, sticky bank deposits is giving way to a more versatile, faster, more mercenary generation (in the good sense of the word), with greater access to different financial instruments. The world is going to have to face a question that we're not really asking right now, and which is basically a bet on the future: who is going to hold all the duration in the credit system. Whether because of business incentives or simply because of their position of power, banks have stretched the gum too far when capturing NIM by relying on the idea that "the customer isn’t incentivized to move money out of the bank". With an unstoppable rise in deposit beta, this leaves us with three main consequences: - A boom in narrow banks that flip the business model and, instead of living off NIM, live off subscriptions and other services. A clear example is Revolut, with a 448% LCR and a loan-to-deposit ratio of roughly 6.2%, living mainly off cash equivalents, not that different from a stablecoin issuer. - Concentration among universal correspondent banks that will be the only ones still capable of holding duration to maturity on their balance sheet thanks to their own resources, but which will be increasingly incentivized to simply originate and securitize, because covering that duration is going to become much harder and riskier. - Growth of the shadow banking system, which will be the main client for these loans and the main recycler of that duration. The two extreme risk tails that come out of this are greater concentration among the so-called too-big-to-fail banks (and the difficulty of new members joining that select club because of how hard it is to scale a bank to that point), and the growth of unregulated shadow banking, which opens the door to greater fragility in runs and more opacity. It’s honestly a beautiful time to be alive.

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