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Discover the transformative power of community banking as Oliver Studd, CEO of Valhalla Network, illuminates the path for small and medium-sized enterprises (SMEs) navigating the 'credit chasm.' From Oliver's unexpected shift from chemistry to banking, to his eye-opening insights under Professor Richard Werner, we journey through the landscape where big banks often fall short, missing the mark on SMEs' needs—leaving a vital part of our economy underserved.
This episode is a masterclass on the importance of tailored SME banking, with a focus on the human element of relationship-based lending. We uncover the truths behind loan security, debunking the myth that small businesses are precarious borrowers when, in fact, they're the safer bets with their over-collateralized loans. Hear first-hand from Oliver how community banks approach defaults with compassion, prioritizing recovery over collateral seizure, and fostering a banking culture that's the antithesis of the impersonal big bank narrative.
Venture into the broader economic impact of banking practices, where we delve into the concerns of the commercial real estate market and the digital banking revolution. Contrast the traditional banking model with the innovative world of decentralized autonomous organizations (DAOs), and learn about the rise of nonbanks, which promise to shake up the financial industry. Tune in for an engaging conversation that not only sheds light on the issues at hand but also offers hope through community-focused banking solutions that empower SMEs, the bedrock of our economy.
Free Coaching Community - http://geomcnee.com
www.cwipodcast.com
E-Book - www.winningmadeeasy.co.uk
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Check out Valhalla Network - https://www.valhallanetwork.io/our-team
Connect With Oliver on LinkedIn - https://www.linkedin.com/in/oliverstudd/
Discover the transformative power of community banking as Oliver Studd, CEO of Valhalla Network, illuminates the path for small and medium-sized enterprises (SMEs) navigating the 'credit chasm.' From Oliver's unexpected shift from chemistry to banking, to his eye-opening insights under Professor Richard Werner, we journey through the landscape where big banks often fall short, missing the mark on SMEs' needs—leaving a vital part of our economy underserved.
This episode is a masterclass on the importance of tailored SME banking, with a focus on the human element of relationship-based lending. We uncover the truths behind loan security, debunking the myth that small businesses are precarious borrowers when, in fact, they're the safer bets with their over-collateralized loans. Hear first-hand from Oliver how community banks approach defaults with compassion, prioritizing recovery over collateral seizure, and fostering a banking culture that's the antithesis of the impersonal big bank narrative.
Venture into the broader economic impact of banking practices, where we delve into the concerns of the commercial real estate market and the digital banking revolution. Contrast the traditional banking model with the innovative world of decentralized autonomous organizations (DAOs), and learn about the rise of nonbanks, which promise to shake up the financial industry. Tune in for an engaging conversation that not only sheds light on the issues at hand but also offers hope through community-focused banking solutions that empower SMEs, the bedrock of our economy.
Free Coaching Community - http://geomcnee.com
www.cwipodcast.com
E-Book - www.winningmadeeasy.co.uk
Instagram
Twitter
LinkedIn
So hello and welcome to this podcast. We've got Oliver Studd, founder and CEO of Valhalla Network. We're going to find out exactly why community banks are a thing, why SMEs are starved and why there's a credit chasm, why it's not obvious to most people the difference between these big banks and big businesses and the small and medium-sized businesses that are out there, that are the cornerstone of employment and productive activity in the economy. What we're going to do today is go over what those things are and show you why community banking is something that should be part of the future and, if it doesn't, what's likely to happen if the chasm widens from where it's at, the figures don't look great, but they're not irrecoverable. We can go out there and we can catch this now. We can get this project off the ground and we can help these small and medium-sized businesses. So, without further ado, let's dive right in. So see, when you're in the pub and someone says, what do you do? What do you say to them?
Speaker 2:pub and someone says what do you do? How did what did? What do you say? Say to them uh, I say I set up banks. That's my short answer. I set up banks, um, and I work in the web free space, but I set up banks, and normally people will say, oh, that's, that's very interesting. And I think they're either being polite or they don't understand what I've said.
Speaker 1:Yeah, yeah, because I mean, it's one of those things like why would you need a new bank? I think that's the question on most people's minds. Why do we need that? We've got banks, why do we need another one?
Speaker 2:Or they think we hate the banks, we don't want more banks. That's usually people's mindset, Is it? I think so. I think that's been drilled into them. I think the media has done a good job of turning people against the banks, made them think that the banks are against them, against their interests, which you know it's not true. But I can understand the spin on that and how they come to that conclusion, because some of the activities that, especially over the last 20 years, the banks have done could be questionable, and the regulators have pulled certain individual banks up on it. I think, pretty much across the time, almost every bank a big bank anyway that has been pulled up on something that they've done.
Speaker 1:Well, it's the classic old it's the cost of doing business. You know they'll flirt with the rules and skirt the laws and you know what happens is they make you know 10 billion quid doing uh, whatever, whatever their, their plan or concept is. And then they get fined about 100 million and they slap on the wrist and they're like well, we made 10 billion and we paid out 100 million a fine, so it's not too bad. And then you know it ends up in the media. So I guess the PR department isn't doing a great job there in terms of when someone in the office is working out those numbers to say is this a worthwhile project?
Speaker 1:Well, usually Lots of things like a lot of people see, you know, particularly in the UK, the PPI scandal and things like that. You know it was UK the PPI scandal and things like that. You know that was all driven by by banks. Um, so it's not uncommon to have a little bit of a weird spin, but that's, I mean, I take it. You, you know you didn't.
Speaker 2:That's not why you started setting up banks no, we didn't do it because we uh the media spin on it. No, it was primarily due to, so I you know. Let's rewind a little bit about my Take us back.
Speaker 1:So you're an eight-year-old kid, you know you're running about down the south of England Did. One day you have an epiphany and think I want to start banks Like where did it all?
Speaker 2:begin no. So when I was eight, I still think I wanted to be a shark. Uh, when I was older, um, I was a little bit slow getting there, I think um, you're getting close because a lot of people think bankers are sharks that's true, that's true, um.
Speaker 2:So, no, back back when I was in school, um, I wanted I wanted to. What I wanted to do changed um, but primarily, when I was leaving school and going to university, I wanted to be a chemist, which is where I first my you know, that's why I did my first degree um chemistry and then, in my sort of final year of my bachelor's in chemistry, I realized I didn't want to do it forever, um, because you narrow too much um you're, you're sort of what you're focused on. I didn't like that. I enjoyed a lot of chemistry and I enjoyed the big picture and I didn't want to be very specific about what I was doing. So I decided I wanted to do something different and I thought I want to work for a big bank.
Speaker 2:That's why I thought while I was at university I want to work for a big bank, the sort of reputation that comes with that, you know the image, you know that these big banks have in the business world, oh, that that would be really cool. How naive I was. So then I did my master's degree in international banking and then joined HSBC Commercial Bank in the UK, which is a great bank for graduates. It's a great bank for the people looking at getting into a banking environment in a nurturing environment. It's not a aggressive bank. It's not, um, a nasty work environment at all. I, in fact, for someone wanting to work at hsbci, I think it's a brilliant, uh, brilliant employer. Um, however, while I was there, I realized quite quickly that the truth of the matter, um, and I I sort of knew it anyway because of my master's degree and studying banking under Professor Richard Werner I knew that banks don't always act in the interest of small businesses, let's say they're not focused on small businesses.
Speaker 2:So while I was at HSBC, I tended to work in the large corporate space, funnily enough, and then I went into the MME space, but it was apparent from the messaging that HSBC was putting out that a lot of the small business banking was again PR. You know we're allocating this amount of funds to support small businesses. Okay, out of that allocation, how much is actually lent out to small businesses? And that's another question entirely. And then I also knew that small businesses they call up, they don't get the same person each time. It's not relationship driven. So the banking environment in the UK is dominated by these big, big Goliath banks and consequently the SME space is very underserved. So I didn't like that. I knew that it wasn't sustainable long term. So I wanted to get out of the big banks big banking space and move into small banks and try to set up small banks to support SMEs, because there isn't enough of them and therefore we need more.
Speaker 2:So then I started getting involved in the small bank space. I became director of local first community interest company where we promote community banking, which is when a bank acts on behalf of the community that it works in. It's a small bank. It helps the small businesses in that community and is very involved in the community, which is why it's called a community bank. And then, while I was at HLocal first, I decided the best way of doing this was to do it on scale, set up thousands of these community banks. And it wasn't just the UK that needs it, it's all over, it's Europe. Developing countries in particular need these banks. So that's what really got me into yeah, let's get, let's get kickstarted with this. Let's start setting up community banks.
Speaker 1:So for the people out there that don't know what SME is and why KHSBC might have failed that sector in terms of what they require, what was going on there?
Speaker 2:So SME, small to medium-sized enterprises I can't even remember the exact terms in terms of Europe. I know different countries have different terms all the time, but for Europe I think it's something like if it's got under 50 million in assets or 50 million balance sheet or something like that, it's classed as an SME. But there's three various metrics for it and you have to be one of those metrics to classify as an SME. The HSBC and Lloyds of the world. What they prefer to focus on is doing few transactions to large businesses, because it takes less. Pound for pound, it takes less effort, if you like. Pound for pound, it takes less effort, if you like. And there's more um, there's more kudos that comes by giving out a 200 million, 100 million, 50 million loan than kudos that comes out of giving out a 10 000 euro loan or a 50 000 euro loan, um, so they they focus their efforts on that space, which means that they underserve or ignore a little bit the needs of the small businesses, and these needs are unique depending on which region these small businesses are in. So you can't have a universal approach to SME banking, which means you can't have one way of doing it which works either across the world or even across a country, and this is the. This is the classification we're going to have in terms of if you come in and you want a loan. These are the metrics we're going to test you on. You either tick the boxes or you don't.
Speaker 2:That doesn't work for small business banking. What you need is you need local bankers with local expertise in that area as to what those small businesses need. So that's the first thing. Then you need to look at SMEs in a different way.
Speaker 2:So at the moment, smes are painted primarily by banks as high risk. Oh, this is high risk, we need to de-risk and therefore we need to get rid of our SME book and offload it elsewhere. But in fact, smes small businesses tend to be lower risk and if you look at the loss given default across several countries I think across the whole world really and before this call I was actually looking at some of the data again For the UK, the loss given default for small businesses is lower than the loss if you're lending to large businesses, and that's the same across Europe as well, and the UK is only a small amount. But for other countries it's much larger gap between SMEs and big businesses, which means small businesses have over collateralized loans. They're much more secure the lending that banks are giving out to SMEs. So if SMEs do happen to default on the loan, the loss that the bank actually experiences is lower which is why it's called loss given default than if it was a big business that the bank has given a loan to.
Speaker 1:So loss given. Default means that if someone defaults on a loan, it means they haven't stuck to the agreement of the loan. Either they can't make payments or the deal has been broken so they go into default. That means the bank are looking to recover the amount of that loan that's outstanding.
Speaker 2:Yes, so it's not immediate. Just because they've missed a payment doesn't mean they're immediately in default. It would be if they miss a payment and then they ignore the bank and then they miss the next payment and there's a pattern starting to emerge that they're not paying back on their agreement, then they would go into default. So it's not as simple case as you miss one payment. You're immediately in default Not quite like that. But yeah, you miss the terms, you miss the payments, you're struggling, you start entering the default stage, which means you defaulted on your loan, which means the bank is then looking at you in a different way. You might even move departments at that point into a recoverable team to look at OK, is there a way we can bring you back on track or is there a way we can recover our money as much as possible? So you even swap teams at that point.
Speaker 2:Now the way the big banks handle this is they tend to grab whatever collateral they can and sell it or offload it or whatever in any way to see how much money they can get back, whereas community banks do this in a very different way. So if a small business defaults with a community bank, not only is it less likely to happen because community banks tend to be closer to their customers. They're more relationship centric. So they have a. They have a close relationship, they know what's happening with that business and they can actually give them guidance as well and help them to stop them going into default in the first place.
Speaker 2:But if they're in default, the bank isn't looking at them as a OK, now we need to get our money back as soon as possible. Not necessarily when it enters default they will immediately do that. They might first look at okay, how can we help this business get back on track? Is there a way this business can become so that they are making payments on this loan again without us just taking all the collateral? And then, in the case of small businesses versus big businesses, if the eventual outcome is they have to get back some of the collateral and sell it. Normally, like I said, the loans are over collateralized, meaning the banks are more likely to get their money back than if they were doing this with a big business.
Speaker 1:So for Pete I mean an easy example for people to understand what would over collateralization look. Look like Okay.
Speaker 2:So if you have a 100, if I loan you $100, george and I said to you I need you to put up some security on that $100. So I want you to put a personal guarantee, which with that comes your house. Let's say your house is worth $150. It means that the loan now has more security behind it than the actual value of the loan, which means it's over-collateralized. That's effectively what it means that you've got more collateral when you need to, if you needed to recover that loan.
Speaker 1:Yeah, so the collateral being the thing that secures the loan, the thing that the security that the loan is given on the basis of is a higher value than the loan amount, that that the security that the loan is is given on the basis of is a higher value than the loan amount that's given out yes, and smes are tend to be forced by banks to put up more collateral and more security than the big businesses are.
Speaker 2:So in the case of small businesses, you will normally have a personal guarantee from the owner and director of the business, and the reason for that is either there's not enough security in the business itself or because the owner and director of the business and the reason for that is either there's not enough security in the business itself or because the owner tends to be the director as well and the shop caller it tends to be one person. If you get that one person to put up a personal guarantee on that loan, you know that they're going to do everything they can to make sure it works and that they can actually repay that loan, whereas a big business, you don't have things like that involved because you won't have one shock caller, one person. You won't ever have a personal guarantee when it comes to big businesses.
Speaker 1:Yeah, that's interesting. So there's another metric as well.
Speaker 2:When we look at risk of SMEs, it's not just the loss given default. You also look at the default rate of SMEs in the first place because the losses, the loan provisions, loan provisions are the amount you set aside to assume that those loans are going to make a loss effectively. So what are your losses on your loan portfolio? And that's your loan provisions and that's your loan provisions, the loan provisions that you have to set aside. So if it's a big bank and they lend to SMEs, the default rate tends to be higher because, again, they're not doing expertise, they haven't got the expertise in-house, they don't have local bankers on the ground visiting those local businesses, having a very close, close relationship with them and supporting them in the needs in the way that they need to be supported most. Whereas a community bank, because of the way it does banking, is much more relationship driven, it tends to have lower default rates on its loans.
Speaker 2:It's also a moral obligation because if you're a small business and you've got a relationship with a small bank and you know that bank's there to help you and you know it's not there to try to make as much profits as possible, suck those profits out of the local economy and send it over shores to the shareholders or anything like that.
Speaker 2:You know the bank's there to support you. You take a loan from that bank. You also have a loan from HSBC, let's say, a big bank that you know. If you repay them or don't, it doesn't really affect HSBC. But if you repay a small community bank or you don't repay a small community bank, it has a bigger impact on that community bank. You're morally more obligated if you like to repay the community bank loan because you know that community bank is there to do as much as it can to support you know it's going to have a more, worse impact on that community bank, whereas HSBC or Lloyds or any of these big banks you just there's not as much care, there's not as much moral obligation to repay it.
Speaker 1:I don't think they need the moral obligation if they're over collateralized on the loan side.
Speaker 1:So the moral desire isn't there because they've extracted all the demands.
Speaker 1:The bank has extracted all the demands and put the onus onto the small, medium-sized enterprise business owners to say, look, not only are we looking to maximize our profits and we don't think your sector is that important and we prefer the kudos of giving loans to bigger companies.
Speaker 1:And if you do want a loan and we do want to give you some scraps, some of the crumbs of our loan department, we will.
Speaker 1:But we want to secure on everything that you've worked for, because that just creates a dynamic where it's not based, you know, on a relationship it's, it's based on, you know, you're a number and we want to secure it in every possible way so that we, you know, we can have our cake and eat it, because the the issue has always been that a loan is given out and there's a certain degree of risk.
Speaker 1:So when there's a risk element in terms of, well, we need to charge this interest rate because of the risk that some people might not pay back their loans. And that's always been the relationship with lending, and that is something that, if you want to be a lender, that's a risk that you need to manage, a risk that you need to understand, and it seems to be that the small medium-sized businesses are being disproportionately hit harder on the basis of, in the bank's desires to secure the risk side of it, they're almost have went too far beyond what they should be asking for because they want to remove as much risk. Asking for this over collateralization yes and no.
Speaker 2:Um, I I don't. I don't agree that over collateralization is a bad thing and I don't agree that personal guarantees are a bad thing. Um, if I, if I'm a small business owner and a bank said to me you don't have enough collateral, you don't have enough security in your business for this loan, you can either put up a personal guarantee or not have a loan. I think most small business owners would say I'd rather put up a personal guarantee so I don't think I mean.
Speaker 1:Look at it. Look at it from this point of view is is that it's? It's back to the situation of right, what's community banks? Why? Why is there a requirement? Right, well, it's. It's similar to well. If, if you mentioned earlier on that the, the reason that the default rate is different between the big loans that are given out and the smaller loans that are given to SMEs is that the SMEs are over-collateralized. That points to the fact that these SMEs are being asked for a different set of criteria from the big loans yes, the loss-given default.
Speaker 1:They're not applying the rules equally across the board, which means that there's a privilege given to higher book, higher loans, larger businesses, and that privilege hasn't been extended to small and medium-sized enterprises.
Speaker 2:Yeah. So one of the reasons for that is, if you're a big business, banks don't put as stringent loan confidence so effectively terms attached to the the loan. They're not as strict for a business as it is for a small business and some reasons for that is because they don't want to lose a business. They don't want this big business who's looking at getting 100 million loan to go to another bank. So they're not going to be as forcing on the um on the confidence. That's one reason, whereas an SME, they they can be very forceful. They can sort of put their weight on the table and say well, look, you need us, we're the big guys, you're a small business, we'll just make loads of terms attached to this loan. That really strangles you.
Speaker 2:They can do that because of the relationship dynamics. So you're correct In terms of the collateral, though, like I said, for a big business you're never going to get a personal guarantee. So it's not just because they are treating SMEs different to big businesses. There's also a reason why they wouldn't be able to do that anyway. It wouldn't make sense. But certainly they're not as collateralized when it comes to big businesses as small businesses and it's for that reason.
Speaker 1:That's what I mean, if you look at the old monopolization or monopolies that were set up, it was these large companies had the monopoly because they had an unfair advantage over everyone else.
Speaker 1:So they'd agreed terms or they'd sewed up certain specifically important sections of industry and they monopolized it because they could control it.
Speaker 1:Well, if the if and today we are in businesses that you know the the credit system, is a ingrained, integral part of that, then he who has access to easy funding has, you know the the ability to have a different um, a different outlook or a different approach that wouldn't be available to these other competitors. So the smaller competitors can't compete because the larger organizations have an advantage that the smaller competitors don't have. And if that's used via banks, because the banks might not be aware of that, they might not be, it might not be obvious to them that someone obvious to them that there's a monopolistic approach. But when you take a step back and you look at it through the lens of well, how do the big banks operate and how do small and medium-sized enterprises operate? What role do they play, and is it as close to a level playing field as we can get? I don't think he can answer yes. I think it's very difficult to make that case.
Speaker 2:Yes, it's not level playing field, of course. So what I'm wary of is we talk very negatively about the big banks, but we just need to be mindful that they have their place as well. So big banks have their role in the economy as well. So big banks have their role in the economy. Their role should really be to focus on these big businesses because that's what they're good at, that's what they do, that's what they want. So let's stop forcing them to do small business banking because they don't want to do small business banking. Let's be honest it doesn't make sense for them, pound for pound. That's how they see it and that's the reality, and small businesses shouldn't be left to have to deal with these big banks. It's not fair on the small businesses. The banks don't have the specific expertise that these small businesses need for them to get as good service as they could be if it was a small bank.
Speaker 2:So why, instead of us trying to force the big banks to do SME banking and the government say these big banks need to do more of it, they need to support our small businesses instead of that, and trying to put the onus on the big banks, which I don't think is right?
Speaker 2:I think big banks, you are important in the economy and you need to help these big businesses and do international trade and all that sort of stuff and also offer retail accounts, because the big banks can afford to offer retail current accounts. Small banks can't afford that as much. You have your role Now. Instead of us forcing you to do SME banking, let's set up banks which are small and dedicated to SME banking. That way, the SMEs are catered for because they've got a bank that knows what they're doing in terms of the SME banking. That way, the SMEs are catered for because they've got a bank that knows what they're doing in terms of the SME space, wants to do, it wants to help these SMEs, and the big banks are happy because they're not being told by anyone that they have to do something they don't want to do. So it works for everyone. So I'm not sure why it's taken so long, really, or it's still not really happening, why people are not promoting and pushing for.
Speaker 1:Well, it's probably not been. It's not been negative on the banks. I mean, I don't think the banks had a grand plan. They drew it up on a board somewhere and they says you know, let's go and stifle something. There's unintended consequences of any action that can be taken and one of the things that happens is the banks probably the big banks have realized that hey look, this is more suited to our style and they have a natural draw to setting up something that's in favor of the way that they operate and that just means that it's not fair across the board.
Speaker 1:And I think the perception publicly is that banks will lend to you know, it's bank lending, the door's open, you can come in and you can get lending. And what they don't understand is that dynamic within banking is. It's not. It's all loans aren't created equal and people possibly are under the misunderstanding that you know, if a business goes for a business loan, it's not all businesses are the same. There's a massive chasm between the availability in terms attached to a loan for a huge business versus the availability in terms attached to for a small business. And that's what we're trying to understand is why are community banks required? Why? What is the problem and that's what we need to understand. Problem, and that's what we need to understand, it's not having a go at big banks because, you're right, like they're, they're in, you know, integral, an integral part to our economy and and the financial sector and the banking as a whole.
Speaker 2:There's no way small banks could ever replace a big bank, because what big banks do especially, for example, if we just take one niche sector of the big banking space asset-based lending, abl that requires a whole department to be experts in asset-based lending. You have the risk associated with it. You have the assessment of the actual assets that are being put up. You then have the ongoing monitoring of those assets. So you have a whole department attached to asset-based lending.
Speaker 2:And asset-based lending only works for very large loans. It doesn't work for 50 grand, 10 grand, 20 grand. It doesn't work for anything like that, which means asset-based lending, which is its own product. It's a fantastic product for big banks to be offering its customers. It can only be offered if a loan size is significant. And then you've got the sexiness attached to big banking.
Speaker 2:For these bankers themselves, oh, they want to do this huge loan out the door. That's complicated and it's going to work with multiple banks in different jurisdictions and different countries. It's international. This is a really exciting one, whereas a 10,000 euro loan for a small business to pay for some upgrade to its ovens, let's say that's not got the appeal, um, for those bankers. So it's a very different space and I don't think they should be combined and anyone should be trying to push the two together. So you're right, uh, big banks have their role. Now let's focus on what's missing, which is the small business sort of expertise and small business banking, and push for it. And how can we fill that credit gap, which is huge and it's growing. So last year the SME lending space declined across Europe, so it's growing the gap.
Speaker 1:You mean, the gap is widening?
Speaker 2:Yeah.
Speaker 2:So the SME credit gap, so the amount of funding and financing that SMEs need versus what they're getting and what we a UK survey, um, done by local first a few years ago, um into, and so this was just before um COVID started and and lockdown started.
Speaker 2:Uh, the research that was done found that two-thirds of small businesses in the UK don't even ask for a loan from their banks, even if they need one, because they don't have that relationship. They don't think the banks are there to support them in terms of their business. So there's a real the credit gap that is seen isn't even the extent of the credit gap, because all they're looking at is okay, how many people are asking for loans, small businesses, and how many of them are getting them. Okay, that's one metric. And then, roughly, what do we think is the amount of small businesses that aren't even asking for loans? That's another percentage, but that percentage is very, um, very low in their, in their sort of calculations, versus what I believe the reality is. So if you take the reality and you apply that, the SME credit gap is even larger than they're saying.
Speaker 1:And what happens if that continues? Like, are SMEs even important? We've got big banks and big companies. What's like for, you know, natwest and a great promotion where the big bankers are out there and they're they're mocking about, uh, you know, they put a, they put a spin on it, that you know, the taking banks off the high street. Uh, moving after the digital is not serving customers, and I think they've got a point. In fairness to them, they do have a point. Uh, high street banking is disappearing and there's a lot of people that have been left behind. They feel that they had a service and that service is reducing, in some cases completely disappeared off the high street. That's true.
Speaker 2:If you're an SME owner and you want a relationship you want to trust, your banker is there to support you, and you might not even have digital skills. You might not have digital literacy, um, so you don't want everything to be digital. But even if you knew how to work digital, um, like I know how to work zoom, I know how to work google meet. Does it replace in-person meetings? No, there's nothing that replaces the connection you build and the trust you build and the joy of of speaking to people in person. So pushing people on digital isn't going to work. It's not what businesses want and it's not what small businesses need. So what?
Speaker 1:happened what happened? What happens if it's left? Then do we even need small, medium-sized?
Speaker 2:Well, smes account for the majority of businesses Across Europe. Globally, over 95% of SMEs make up economies, so you've got over 95%.
Speaker 1:We have Amazon, so we have Amazon and we have a banking app. Do we really need small, medium-sized enterprises?
Speaker 2:Well, like I said, they make up the majority of the economy, so if we didn't need them, they wouldn't be there. People like working with SMEs. They like working with small businesses. Just because you order it on Amazon doesn't mean it's not come from a small business. Anyway, it might be that a small business and oftentimes a small business has supplied it to Amazon, who has then sent it on and they've taken a nice cut in what that small business is struggling to make.
Speaker 2:Small businesses are the biggest employer.
Speaker 2:So if you take that as well, two thirds of employment is through SMEs.
Speaker 2:So if you restrict the financing that these small businesses have, it means that they can't grow, they't develop, they can't innovate, they can't continue to to survive in a changing world, which means ultimately you're going to get bankruptcies, you're going to get unemployment rising and you're going to get a huge equality gap forming. Because smes, you get million, million, uh, millionaire makers, the, the owners of smes. If the smes do well, you get more millionaires and stuff like that, because these sme owners are thriving doing well. If you cut the number of businesses as well, you're going to cut the number of people who are, who are, who are pocketing money, and sme owners tend to be more um sharing as well, in terms of the, the, how they pay their staff, um, they try to keep it more you more equal as well. They tend to be more community focused and stuff like that. So if you're forcing everything to go into the hands of a few and you're concentrating businesses, you're going to have an even larger quality gap than already being seen across countries.
Speaker 1:So here's an example. I mean, I'm thinking in my head. There's people out there that think banking is banking. They just think that it's just one thing. And there's people out there that think the economy is just one thing, and it's hard to put these terms and terminologies and explain a problem if you think that way.
Speaker 1:So why does it matter if a big bank lends to a big company and it doesn't want to lend to a small company? Well, why would that affect me? Why is that my problem? I've got my own issues, I've got my own day, I've got bills to pay. Why do I want to worry about this? And I was thinking to myself there. What would be an example of that?
Speaker 1:Well, imagine that you're employed by a small, medium-sized enterprise and that business that that small, medium-sized enterprise is doing is it's looking to grow and say there's a piece of equipment that business needs to buy and it's one million pounds and it will make the production line much more efficient, which means that that small, medium-sized business can become more competitive in pricing so it can get more business, it can tout for more business, it puts it in front of more customers that can afford that product based on this investment and say there's a larger business that's in the same space and it's a hundred times the size, so it wants to buy 100 million pounds worth of this equipment because they also want to become efficient.
Speaker 1:So you've got a situation where you've got the big company that has greater access to finance and has less lending criteria applied to them in way of terms, versus the small business that employs two-thirds of people. This SMEs, the two-thirds of people are employed there. If they go and apply for that loan for a million quid, they're going to need to put up their house security personal guarantees. It needs to be over collateralized and they may not get the loan. If they go and apply for that loan for a million quid, they're going to need to put up their house's security personal guarantees. It needs to be over-collateralized and they may not get the loan because the big bank might go.
Speaker 2:Yeah, they don't even get in the front door. That's the reality of these SMEs is it's difficult for them to even have a meeting and get the attention of the big banks. Even if they've got the collateral, even if it's a really appetizing loan, it's difficult for them to get the attention.
Speaker 1:So what happens next? What do you think happens next? What happens next is the big company gets a loan. They become efficient and they become even more competitively priced. The SME can't compete now, so their margin gets crushed. Now what happens is they're under financial pressure. When they're under financial pressure, if they couldn't get a loan before now, they can't get it now. So they then start to let go of staff, because the staff is in that the most expensive part of an SME is the staff. They let go of the staff. Now you going hey, I don't need worry about banking. What's it got to do with me? Now he's got you right in his crosshairs. Guess who buys the small business for pennies on the pound? The big boy that got the hundred million pound loan. The big company. And they call it, uh, consolidating the sector.
Speaker 2:And then they streamline as well, because what they can do is they can say one manager can do the role of two managers and stuff like that, so they can start streamlining and but it's it's. That's on the sort of, if you like, the micro scale in terms of, okay, if you're one individual working for one business, that's how you see it. There's a macro scale as well. So let's say you work for a big business, so you don't even notice that. Well, firstly, who are the suppliers of these businesses or these big businesses? Oftentimes they're going to be small businesses are the suppliers. So, like I said, in the UK it's over 99% of businesses are SMEs, so they are going to be suppliers there, which are SMEs. So if you're not helping these SMEs in some way, these big businesses are going to struggle in some capacity as well. So it's going to impact you. But let's say, take all that aside. Let's say that your job, it doesn't have an impact on you at all in terms of I work here, my business is thriving, I don't care what happens to SMEs. Let's say that's your world.
Speaker 2:On the macro scale, it still has a big impact because what we find is that loans that are given to SMEs and small businesses are more productive in general than loans that are given to big businesses, and what I mean by that is there's different ways you can classify loans. So every time a loan is issued, if you like, it's actually created Money is created in the system. So a survey that was done and it asked various individuals. It asked them where's money created? Who creates all the money? And people were either answering the government or the central bank. What they weren't answering is the banks themselves, the private banks, and that's where over 95% of the money supply is actually created. It's by the banks themselves every time they issue a loan. So now we have a case where that loan that is being issued and the money that is being created has a more important impact on the wider scale than you originally thought, because it's no longer just moving money around, it's actually creating money and that's going to have an impact.
Speaker 1:So then, people understand what you mean by that pardon. Do you think people will understand what you mean by banks? Create money?
Speaker 2:so every time a bank is issuing a loan, the way it handles its balance sheet. So a non-bank it takes deposits. Let's say a non-bank. What it will do is it will segregate client money from its own money, its own business money, its own balance sheet, and it will put its client's money elsewhere. A bank doesn't have to segregate client money, so that's the first thing. It puts it with its own money, its own pool of money. And then what we find is, when banks actually issue a loan, what happens is the balance sheet changes Instead of it just saying okay, so now we've got cash and we're going to reduce our cash and we're going to make that a loan.
Speaker 2:So the length of the balance sheet doesn't change, just the items on the balance sheet changes. That's a traditional sort of non-bank financial company, if you like. But if you look at a bank, they do things differently. They can do things differently. They're allowed to. What they can do is say, ok, well, we've got a loan and we know that money is like deposits, right, so you have a deposit at our bank and that's classed as cash, if you like, in the system. Now, instead of us giving you cash, what we could do is just say that you deposited money with us, now it's. You know, it's not. Just say that you've deposited money with us, now it's not reality. No one's deposited money with them.
Speaker 2:But what they can do is they say okay, well, on the liability side, instead of us having an accounts payable because we owe you that money, we owe you the loan amount that we've given you Instead of us paying it to you in cash, why don't we just change that accounts payable item from accounts payable to cash? Why don't we just change that accounts payable item from accounts payable to deposit? Why don't we just say you deposited that money with us Because that's what everyone else has done? It's the same. It's used as cash. So suddenly, what you've got on the balance sheet is, instead of item changing and going from you've got an item changing from loans sorry cash to loan on the asset side what you've got an item changing from loans sorry cash to loan on the asset side what you've got is you've got cash staying the same, you've got a loan item added there and what you've done on the liability side is you've simply created a deposit. So banks are actually in the business of creating deposits, issuing deposits, which, when you get your head around that, you suddenly realize the importance of banks in the macroeconomical sense. So then you can start delving into the impact of bank loans and where it's issuing money.
Speaker 2:So, without diving too deep into the detail, what we find is that banks are loaning large amounts to large businesses.
Speaker 2:In general, these loans have a less positive impact on the economy than if they were lending to small businesses, and oftentimes what we can be doing is lending for unproductive purposes that are actually damaging to the wider economy. So then, if you've got a banking system that is almost entirely lending for that purpose and creating credit for negative or not as positive purposes, as a banking system which is lending to small businesses in a very productive way, the ratios start going out of sync and you start getting banking crises where people can't afford to pay back their loans but big businesses can't afford to pay back their loans, banks struggle, you have banks having to ask for bailouts and ultimately, the economy suffers. Now, as an individual who works for a big business, you realize that SMEs are important and lending to SMEs are important because even if you're not working with them or they're not a supplier of yours or anything in the chain of things on the macroeconomical sense. What banks are doing have an impact on your life.
Speaker 1:In summary, so for people that can't get their head around that, we'll try and do a bit of an analogy. Most people think banking is like this you live on an island and there's a hundred people on the island and you all have 10 pounds. Someone decides to open up a bank, right, and you all go look, we don't need this money just now, and you all deposit 10 pounds in the bank. So you deposit the 10 pounds in the bank and you think someone wants to get a loan, somebody wants to build a shack. So they go to the bank and say, look, I need to borrow £100. So can I borrow it from the bank?
Speaker 1:And what people think is that the money that's been deposited at the bank is in a vault somewhere and if someone wants a loan, the bank then lend out. There's no additional money added. It's the money that's used, that's within there, that's been given to the bank, that's lent out. That's what people think. So there's 100 people on the island and they've all got a tenner, they've deposited £1,000 at the bank, there's £1,000 in the bank and if someone wants to borrow £100, they lend out the £100. There'll be £900 left in the bank and the the person is actually using money that has, that is existing in the system, or is the people that have paid the bank to deposit it. And their understanding is is that? Well, if you take a loan, the bank's essentially being the middleman they're lending out the money to the person that wants to borrow it and they are managing that loan to take the money back so that they can pay their customers that have given the money.
Speaker 1:So that's the the island situation and people often ask about like they get fractional reserve lending around the wrong way a lot of the time. And it's an interesting concept because you'll say how do you think fractional reserve lending works? And it's the fractional reserve lending or credit creation is the bit that people get stuck with. So it's like the same hundred people on the same island with the same bank and each have 10 pounds. They've all put it in the bank. So there's a thousand pounds in total in the bank.
Speaker 1:And how the credit creation license works is the bank creates new money. So when the person that wants to build the shack what asked to borrow 100 pounds, it isn't 100 pounds that comes out of the money that's been given to the bank. The bank actually creates a new 100 pounds through this banking license where they can take that 100 pounds and lend it to the person that's wanting to build the shack. So, instead of the total money supply being 1,000 pounds, it's actually now 1,100 pounds. So you go, okay, right, so the money is created, but what you've went on to say there is is that, well, it's a powerful tool if you can create that money and what you give that out, what purpose you give that lending for, can can distort an economy, meaning that if you give these out for really productive reasons, then it's great because you have productivity, you can, you know, people can prosper, there's growth, people can get employed. But if you give that lending out for speculation or speculative purposes, what happens then is it distorts the economy and prices within the market.
Speaker 2:Yeah. So a couple of things just to clarify. So the first thing is for people who've heard of fractional reserve banking and many people have, and they sort of get their heads around that Fractional reserve banking is not credit creation in terms of it's a different theory of banking and it's actually been proven wrong. Fractional reserve theory is all around. The reserve requirement at the central bank and the Federal Reserve came out many years ago and also admitted it. They put in one of the very bottom of one of their press releases. You know it's very hidden. They basically said we're abolishing reserve requirement because we realize it has no impact. So they just did it very bottom of one of their press releases In 2014,. You know you don't have to take my word for credit creation.
Speaker 2:In 2014, the Bank of England came out and admitted as well in their official statements that banks issue deposits and they create money out of thin air. So the central bank commits it as well. But what you're saying is right. So you've got this thousand pounds in the system. You've created another 100 pounds. Now that 100 pounds, if it was used for productive purposes, then ultimately the the business that's borrowed it has used it productively, which means they can repay that £100. Everyone's happy because there's been growth, there's been productivity and the money's then repaid in the long term and, of course, when money's being repaid, more money's being created as well. So it's a never-ending game of money creation and money repayment On the unproductive side.
Speaker 2:Wherever you're creating this money, you're effectively inflating that part of the economy. So you've got GDP transactions, which are transactions that result in nominal GDP growth. So that can be consumption, it can be investment and, for example, if it's consumption, that's not negatively a good thing. So in 2020 to 2022, when consumption boomed and credit was being created for that element of GDP, we saw nominal GDP rise. Fantastic. Everyone thinks that's great because you've got growth. Actually, real growth was low because that was all down to the inflation of the consumer prices going up, because you're pumping money for consumption. So prices are going to go up as more people are buying goods but there's less goods being created. But you've got something even worse than that. You've got something outside of GDP, as you said, like asset price speculation, which is, let's say, I'm going to the bank and I'm saying I want you to create credit for me to gamble on the asset markets and to buy assets effectively just buy assets which don't contribute to GDP. So let's say I want to buy real estate and that's it, and I'm going to gamble that the value of my real estate is going to go up and then I'm going to sell it. Okay, the bank's creating money for that purpose.
Speaker 2:What happens is is that industry starts to get inflated. It's like a balloon being inflated with air, that money is being put in there, which inflates the whole system. So prices are going up. Everyone's happy. The banks are happy because the value of the collateral, which is the real estate that has been purchased, is going up as well. So the banks are protected. The loan is over collateralized at this point and the borrowers are happy because suddenly they're getting a return.
Speaker 2:So what happens? More people borrow for this purpose and the banks give out more loans for this purpose. They create more credit to go into this industry, which inflates it even more, and it goes up and up and up. Now this is great until the music stops playing, until the banks stop creating credit for that purpose. And as soon as that happens, everyone realized the prices are way overpriced. I'm sorry, the assets are way overpriced. Suddenly, the collateral that's been posted by the borrowers is worth nothing and the borrowers can't repay the loans because suddenly the value of their investments has fallen, which means banks are then left with this awful portfolio, this awful loan book which isn't going to be paid. So it's called non-performing loans.
Speaker 2:And banks only have a very small margin of error because they have the capital, the actual bank capital, tier one capital, is their sort of um, if you like, that's their buffer of if everything goes wrong.
Speaker 2:How much of a mistake can we make before we declare bankruptcy, that we have no capital left to cover our losses? And it's only very small. You know, you're looking at there's various buffers attached due to basal requirements, but you're looking at the. The first minimum amount is eight percent and then everything goes added on to that. But let's say eight percent, even if we say 15 percent is, if banks have 15 percent of their um, tier one capital, it's still nothing. That means if you've got 15 of, your loan book has all defaulted and they're not. And there's also it's all losses and they're not repaying it and the bank can't get the money back. The bank's done so. It's a very small margin for error which, as soon as you realize all that, you realize, okay the purpose of the loans that have been given out. That has a huge impact on the macroeconomic space. Maybe we should focus more on helping those small businesses which are productive and can repay the loans.
Speaker 1:Yeah, why would you not just get the when you said there, the Federal Reserve put at the bottom of their statement that capital requirements aren't really a thing.
Speaker 2:Not capital requirements, reserve requirements. So that's the amount of reserve that banks have to post at the central bank, and they said it doesn't impact. It doesn't make a difference to the amount of credit that is being created by the banks. That's effectively what they were saying. It doesn't impact and that's because the theory of reserve requirements is based on the fractional reserve theory of banking, which is incorrect. Banks can create money regardless of what the reserve requirement is at the central bank. Pretty much yeah. Why would you?
Speaker 1:why would someone that can create money regardless of what the reserve requirement is at the central bank pretty much yeah why would you? Why would someone that can create money out of thin air need to have a capital buffer when they can just make more money?
Speaker 2:because, because you've still got cash on the asset side, it's more complicated than just a case of we can create more money. You've still got to have certain ratios to make your business work. The bank can't just keep creating money forever Now. The cash on the asset side will eventually fall. Because if yes, if deposits are always in the system and you've borrowed it from me and you've kept it in your account or you've lent it to someone who's got an account at my bank as well, the deposits are always on there on the liability side.
Speaker 2:But let's say, at some point that cash amount has been drawn down on, or even if it hasn't been drawn down on, you've suddenly got these. All these assets you've created on the balance sheet are worth nothing, but you've suddenly got all these liabilities still, you've got a mismatch there, and that's where the capital has to fall, because the balance sheet has to balance. So if the liabilities are one number and assets have reduced because the value of those loans have gone down, therefore the value of those assets have fallen you've suddenly got to make up that difference by reducing your equity. The liabilities haven't gone down, but the assets have.
Speaker 1:Liabilities in equity. The liabilities haven't come down, but the assets have liabilities and with this, discussion is the amount of money owed to customers.
Speaker 2:Yes, because, funny enough, deposits are not my, so your deposit at the bank is not your money. It's actually a claim you have on the bank. It's it's saying that the bank owes you that money. That's what a deposit is. Yeah, it's, it's to this day. It still. It gets me out sometimes because it's not a, it's a very complicated. A bank is a very complicated or not complicated, sophisticated internal workings. As to how the balance sheet works, as in in the macroeconomic sense. I'm not on about in a micro sense, when you're just looking at one bank, that's fine. But if you're taking out all the different banks put together and you start looking at all the different transactions that are happening in the market, they're sophisticated machines and the impact they have on on people's lives is, is, is and people don't respect that or understand that.
Speaker 1:So see, I'll be your kind of devil's advocate here, Like Ollie. Why does this matter to me? Why does it matter? It seems that these big banks have got it done. They've got it solved. Sure, everyone wants to get into business, but business is risky. Nine out of ten businesses fail within the first year. Nine out of ten of those that survive fail within five years. So it's a risky game. Yeah, why?
Speaker 2:am I worried.
Speaker 1:Why should I be concerned about?
Speaker 2:like, let's say for you, for you, george, what, what, what are your majority of your assets, would you say in your in for your life, your majority of your net worth? What is it? Is it investments? Is it cash? Is it cash in the bank? Is it hard assets or is?
Speaker 1:it. Cash is trash, anyone. Cash is absolute trash and the thing being is, is that when you, if you want to, if I was going to lend my money, and essentially what I'm doing is I'm lending my money, do I want to lend that to the bank? Do I want them to depose me of my cash? There's many, many better places to give your money to than the bank yeah.
Speaker 2:So that's the first thing is, if you've got cash and you've got a deposit at the bank, you're at risk due to all this activity that the banks are doing. That's the first reason it would impact you. Now let's say let's look at the real market. Now let's say you've got a load of real estate on your portfolio. The banks are playing games with the real estate market and doing this, and they're lending for people to effectively gamble on the asset markets. That means the price of these real estates are going up, but at some point they're going to collapse and you're going to have a market collapse and all those assets are going to fall in value. Well, suddenly your investments are going to decline in value as well and become worthless as all the real estate market crashes.
Speaker 2:So there's it pretty much impacts anyone. You can't ever be protected from what banks are doing. You can't ever completely segregate yourself away and say this doesn't impact me, because even if you've got a load of gold and that's it, and all your money is in gold, hard gold, and you haven't touched anything else and that's what you use, and when you need money, you go and get the gold valued and you exchange it and you quickly use that cash, so you've not got any sort of? Um feel like you're very isolated in terms of your risk and because, let's say, the gold market isn't going to be massively influenced by um whatever's happening in the real estate market and and and bank. You know recessions and and economies collapsing let's say the gold market is rather isolated and protected from that.
Speaker 2:Even in that case, which businesses are you going to go and visit and and do your shopping with? Who are you going to? Um take your kids to go and play? Um. You know activities and do indoor golf and stuff like that. These various things, um how are you going to live your life? What are you going to be doing? Businesses are impacted, so therefore you are naturally impacted because it might be that suddenly you realize all these businesses you wanted to go to and you wanted to spend your time with suddenly are no longer there. They're all bankrupt.
Speaker 1:So you can never be completely isolated from what's happening do you think people understand contagion and the sense that how everything is connected globally and if I don't.
Speaker 2:I don't think it's so much whether or not people understand contagion. I don't think they do. I largely I think it's more. People have their own problems. They have their own concerns going on, but they don't want to worry about anything like that. They don't even want to try to get their head around anything like that. So therefore, you've got a majority of people burying their heads in the sand, which means what's happening and these tools that are being pulled and levers that are being pulled, and the activities are going largely unchecked or not unchecked, but the people are not holding every you know those responsible that they should be, because they're burying their heads in their. They don't understand it or they don't want to. I think that that's the biggest problem.
Speaker 1:I mean, I'll give you an example of a, if you like, of a conversation that is typical that I have. So people will come to me and say what do you think of this? So an example yesterday was you know, do you think that I should buy this property? And I says, well, like, what's your plan with it? It, what do you want to do with it? And it was a a significant jump in terms of the property that they're currently living in to the. They're wanting to make a big move, a big trade up. And I says well, you know, timing is everything.
Speaker 1:Timing is everything when you buy a property, because there's a time to buy property and there's a time that there isn't a great time to buy property. Like, for instance, if you want to buy a property and you bought it in, say, 2002, then you're going to have a great position with that property because you've bought it at a good price and the prices have risen and they've fallen and they've risen again. But no point is, the prices went below what you've paid for it. If you'd bought, for instance, that property in 2007 when the great financial crash happened, it's possible today that you still might owe more money than what that property's worth. So the timing is everything, and this is well you. You know how is it possible, and this is well, in five minutes I will explain to you what the issue is, and it's well. We deal with a banking system. That banking system has got important roles, but it's highly complex and not easily understood. So here's some of the things that have happened.
Speaker 1:We have a commercial real estate bubble in the West, and particularly in America which has got a significant risk attached to it, and that's been banks that have lent on the basis that everything's great, it's all going well. But those businesses that they have lent this the basis that everything's great, it's all going well. But those businesses that they have lent this commercial real estate to are predominantly small and medium-sized businesses, and those businesses have been starved and been outpriced because the other lenders that are the dynamics of bigger companies have a privilege that these small, medium-sized businesses don't have. And then you add inflation, and then you add an energy crisis and you add the interest rates going up. Now you have a perfect storm for these small, medium-sized businesses of taking these commercial real estate loans to fail.
Speaker 1:And when they fail, then the banks have a big problem that they can't resolve. And then what they do is they change their lending criteria. So they go look, we need to watch who we lend this to, because we've got some problems. We need to get some money in to cover these losses. But then that affects the people that are out in the market that are looking to buy property, because if banks don't lend or they're not as willing to lend as they were before, then that reduces the amount of people that can particularly go and buy property. Yeah, then you add in that interest rates have moved up 500 percent and it's, it's twice the largest increase. So if you go from, if you go from one percent to five percent, that rate of change is 500 percent yeah, when you said it I thought let's just clarify that quickly.
Speaker 1:You've got someone that's went from like 1% to 6% interest rate. Their effective rate of change is five times the cost of that loan has went up 5x. And the largest ever move that has ever been made was in the 80s and it was half that rate of change and it caused a cataclysmic recession in property. We've just went through two times the largest ever interest rate move in that same period of time. And then you look at well, why are the small and medium-sized businesses struggling? Well, they're struggling because their costs have went up. Their lending that they're paying has went up. Their interest rates have went up. Their customers that they sell to they've also went up. So they've not got as much free capital. They don't have as much free money around.
Speaker 1:So what happens is people are tightening their belt. They're not buying the things that are nice to have, they're buying the essentials only. And then what happens? You have this domino effect where if the customer that they're selling to has a mortgage that's went up 5x, then they're not spending the way they do. They need to tighten their belt dramatically. And if they're not buying from the small, medium-sized business, then the small, medium-sized business has now not got the same level of customers and they've also got the increased rates that they need to meet. And so what do they do? They think, well, can I, can I get some borrowing to bridge the gap? Who do they go and talk to? And it's like well, this is what I mean is now you've got the small, medium-sized business that's serving the retail customer, that's a supply chain for the big businesses, and if that link breaks, then we've got a problem. Bear in mind that two-thirds of the people that are employed are employed with these types of small, medium-sized enterprises, and people can't get their head around the contagion.
Speaker 1:And what I said was I wouldn't be buying a property if it wasn't income generating and I couldn't ride the storm here, because I think the property prices are going to go down. And the reason that they're going to go down is you've got a whole batch of people that have agreed a two-year mortgage rate at one percent in 2022 and now, when they get their mortgage renewal, that interest rate's five and six percent, which is 500 percent higher than they're used to, and twice the jump in interest rate of the largest move that was ever previously made. So they're all going to get a shock when they see their mortgage renewals, so they're going to be forced to sell them and what will happen is prices will come down because the people that could have afforded those houses previously at the one percent interest rate now can't do that. Because they go to the bank and you say, well, what do we do? And this is why it's like plugging the gap, like you go.
Speaker 1:Well, why community banking? Well, it's like there is that if you can get productive loans to the right businesses, that's a thing. It can bridge the gap. You, it's not just a chasm, but you've got a time bomb going off. And if you can serve those small, medium-sized enterprises, they you can give them a lifeline which keeps their business alive, which can keep the employment going that can help them navigate these tricky financial waters that we're about to go into you're 100% right.
Speaker 2:And one thing that's important to note as well is the regional banks in the US. First off, they're not small banks. So people think regional and they think, oh, that's not the big glass or anything, yeah, but it's not community banks. So that's the first thing. So these regional banks, which have all this commercial property on its asset, on its loan book, it's lent for commercial property, even if it's lent to SMEsEs. We've been talking about SME loans and how important they are and stuff that is not productive lending. So what the banks were doing there and lending for commercial property isn't what banks should be doing. In fact, that should be. Mostly non-banks are dealing with the commercial property space because it isn't productive lending. But now, of course, there could be an argument made as to how you can turn it into a productive loan and oh well, that was being used for that and therefore it's productive in the long run. In general, if you look at the large picture, generally those loans aren't productive, so that should be non-banks.
Speaker 2:When I'm talking about SME lending and community banking, what I'm talking about is only productive loans, or at least almost exclusively productive lending, which is when you're lending to SMEs, not so they can buy commercial real estate, but so that they can invest in new machinery or develop their ongoing processes or something like that, so that their business is either generating higher cash flows or it's costing less, or something like that, so they can repay the loan. So really important distinction there as well. It's not just about the customer, but it's also about what that customer is using the loan for and how that can impact the market as well, because as you are lending for commercial real estate, the commercial real estate market is being inflated with all this extra cash that is being created. So if you're giving that to non-banks, you're not having the creation of additional money, which means you're not getting artificial inflation, which actually comes about, If that makes sense.
Speaker 1:Yeah, and it's about understanding the dynamics. This is the thing is that if you explain to people it's done this way and here's the consequences, consequences and when the chicken comes home to roost, right we've got. We've got the canary in the coal mine at the minute and the you know for anybody that doesn't know, the Canadian, the coal mine used to take a Canadian coal mines and it would be a monitor of any dangerous gases. So you would find the canary would be dead and it meant you had to get out rather than you just staying down there and not getting the warning. Well, things like real estate prices and commercial real estate prices that's your canary in the coal mine for the economy, because you're getting to see what's going on there. And if you look at the data and look at how everything's connected, you can see the link between productive lending, non-productive lending, speculation versus growing a business, how that relates to small businesses being employers, what that generally means for supply chains. You start to see the connections and everything, rather than it's just isolated. Well, why would I be worried about a commercial real estate problem in america? Well, you know, and it's like, well, if you think about how that might actually spill over to you.
Speaker 1:I remember the famous one. There was a famous one where I was a. There was a, a car manufacturer in detroit that had to go bankrupt because there was a tsunami in japan, because they couldn't get the part, make the cars. And then, when the supply chain had broken and it was the connectedness between the two points you go well, why would? Why would that affect somewhere over here? And people don't understand the connections. And it's when you see the connections you realize how important these connections are to uphold. And I think what we've tried to illustrate today is is that you've got these smaller businesses and you have these larger businesses. They're both really important and the larger businesses have a lifeline and an ability to survive that isn't in the same format as for small and medium-sized businesses to survive. And if there's a banking, if there's community banks that are created, you can create a lifeline for those small and medium-sized enterprises that maybe the big bank hasn't noticed, hasn't focused on or maybe is overlooked.
Speaker 2:It's more than just a lifeline, though, not only are you creating a lifeline, but you're also reducing the probability that that lifeline will be needed in terms of because you're supporting SMEs and you're supporting the productive part of the economy. Ultimately, the economy is going to be healthier, so therefore, these lifelines are less required as well. Well, businesses are not going to be going through such a hard time because the economy is going to be in a very productive, healthy state. Uh, growing people employed, employment goes up, inequality comes down. All these positive things are happening when you're supporting the sme space. If that makes sense, it's. It's yeah, it's not just a case of if they need a loan, is that loan available to them? It's. Can we help those small businesses develop and do better and grow, even if they don't need it necessarily, because in the economy, that will lead to a more robust and healthier economy in the long run so who?
Speaker 1:who would be interested in the type of project that that you've got here? Who have you, who have you, been speaking to? Who's who's this, who's who's this appealing to?
Speaker 2:well this project.
Speaker 2:What we're doing is we're combining the ethos of the web free space and the potential the technology offers in terms of of decentralizing governance as much as possible.
Speaker 2:We're combining that with a heavily regulated banking space and the power that banks have to create money and the the impact that has on the economy. So we're combining these two, these two worlds. So not only does this primarily, uh, those interested in this would be small business owners, those directly seeing, uh, how banks are acting and how they, um, they speak to small businesses or how they even, you know, can you get in the door of these big banks. That primarily second it's, it's generally, um, like you said, no one is isolated from what's happening here. So pretty much everyone should be looking at this project and saying what this offers is paramount to the future of economies and the future of businesses, because we are trying to fill this credit gap. We're trying to stimulate economies and create economic hubs with our community banks so that businesses can thrive. Economies are generally more robust. So this isn't really very much isolated to one target audience. This encompasses pretty much everyone.
Speaker 1:For those out there. I mean, like playing devil's advocate, like big banks have huge balance sheets. If this was such an important tool and it was profitable, why? Why are they not doing it?
Speaker 2:why are they not doing what? Why are they?
Speaker 1:not like. Why are they not doing sort of like a community tier banking? Because the idea is is that if this, if there's mileage in doing this, then surely people would think, surely the big banks could be doing it?
Speaker 2:so they've got their own business models. Like I said, big banks are important with what they do and how they interact with big businesses. Now, yes, could they improve things? Yes, could they be doing less unproductive lending? Yes, of course they can. And yes, could they focus almost entirely on productive lending to big businesses? Yes, so, like I said, there are ways that they can improve, but they have their own business models. They have their own ways that they're seeking to make profits. Secondly, their shareholders are very different of a big bank and what they're trying to get normally is the bottom line. They're focused on the bottom line and they're trying to either get growth or, in terms, in terms of their business, their own bank they're trying to get growth. They're trying to get additional profits for the shareholders something like that very different mindset to what community banks trying to do. A community bank is almost exclusively focused on uh, local community growth and prosperity for the local businesses in that area. So it's a very different business model.
Speaker 1:Yeah, but why are they not doing it Like? Surely the bank's full of really smart people? If they spotted an opportunity gap, why would they not sell it?
Speaker 2:Because they're making their profits doing their business model. Community banking isn't as profitable for a bank. It's still profitable, but it's not banking isn't as profitable for a bank it's still profitable, but it's not as profitable. So, for a big banks, if they can make additional profits or higher profits by focusing on on big businesses that they want to work with and doing different types of lending, then they will do that, because that's what their shareholders want additional returns. They want growth for the bit for the bank, so that's what the executives are going to be focused on delivering so tell me about the web3.
Speaker 1:You said the, the web3 ethos. What's that?
Speaker 2:well. Generally, web3 was especially in in the decentralized autonomous organization space, dows um, which we our structure is is as similar to a doubt as possible, bearing in mind we're working in the most regulated space. It's around the community and the community working together to do good and community working together in order to deliver on something or elevating everyone's voices so that not one person has all the power or one person's voice is elevated above everyone else's. That's what Web3 tends to be around, or at least the DAO space of Web3 in particular.
Speaker 2:Whereas traditional businesses have a very not only are they very the shareholders tend to have a lesser voice. Especially the smaller shareholders have a very, if any, voice at all on the table. Especially the smaller shareholders have a very, if any, voice at all on the table. But the community is less part of the project. The shareholders together are less part of the overall, how the project functions, how it develops, and they steer it less. That's mostly over to the management team, Whereas in DAOs you have the community behind it. You have a community trying to make decisions and working together to get to the outcome that is prosperous for the entire group. That's the key part is that it's more like a cooperative working together.
Speaker 1:So what's a DAO?
Speaker 2:So a decentralized autonomous organization, so a true DAO, which exists just on the blockchain, if you like, and it doesn't have a real world entity or real world vehicle. It will work through smart contracts. So, as a token holder, you will vote on proposals. So various proposals might come forward and might be proposed by token holders by other token holders, such as if it's a true DAO, it might be a proposal such as we want to use X amount of the treasury in order to just move assets. Let's say, we want to move X amount of our treasury into different assets. Or we want to sell Ethereum for Bitcoin, something like that. Let's say a simple proposal like that it has a treasury of Ethereum. We want to sell Ethereum for Bitcoin. It's a proposal that's made. The community look at it. They decide whether it's a good idea, whether it's going to help the overall project's mission in whatever mission it has. So it could have a completely different mission to what the proposal is, but the proposal might help in achieving that mission. The community look at it and then together they are voting on that proposal. So then you're taking the decision making. Instead of it being one person or a centralized body, you're trying to decentralize the decision making as much as possible by putting it in the hands of the many, and then the vote. Whatever vote comes forward, it then be automatically, automatically through smart contracts, it'd be executed automatically. Now that's like a true DAO because it's on the blockchain, everything is is based on smart contracts and it's all executed automatically, is based on smart contracts and it's all executed automatically.
Speaker 2:However, the majority of DAOs, I'd say, aren't true DAOs. So what we're setting up is something that is as DAO-like as possible, because we've got a real world entity. There's going to be a foundation in Lichtenstein. Now, if you've got a real world entity, you've got to have people who are responsible for that entity. You can't have a collective group, thousands of collective group of people who are token holders, who are not registered because it's not security. You can't have them responsible legally for the foundation.
Speaker 2:So you've got to have individuals, which means you've got to do things in a very different way, and the rights that the token holders have have to be carefully worded in articles of association and bylaws.
Speaker 2:So that is clear to both the regulator as to how this foundation operates, but it's also clear to the token holders that they do have proposal rights, but their rights are limited because there are individuals who are legally responsible for if that foundation does something illegal. So therefore they can't have it where token holders have ultimate control over the foundation. So I hope that sort of clarifies the difference there between a true DAO in the blockchain space in terms of it has no real world entity and everything is executed automatically on the smart chain, on through smart chain as smart contracts, versus what we're doing, where we are using smart contracts and we are using collective decision making power but due to having a legal, real world entity, there has to be articles and bylaws are carefully written so that individuals who are responsible in this case it's called a foundation council they cannot be beholden or legally responsible if the token holders have ultimate decision-making power and can decide to do something illegal. That's the point.
Speaker 1:What's the advantage of that over the existing structures that are available?
Speaker 2:So the first thing is it creates a sort of firewall, if you like, because it removes the decision making from a centralized body which can make mistakes or can be corrupt in some way, so it could be acting in its own interests.
Speaker 2:It removes that and it puts it in the hands of the whole community, which they're looking at the proposal and they're looking at whether or not, or they're assessing whether or not, that proposal helps the community. Together it helps the ecosystem in some way. So they're not looking at it individually. Does it help me, and only me? Because if it only helps them it won't help the ecosystem, which means ultimately it doesn't help them. So together they're looking at this proposal and deciding um, deciding if it, if it should pass.
Speaker 2:If you have a centralized body, that's normally done in a very individual way, or it could be done in a selfish, corrupt way and not in the interests overall of the mission of the foundation or the mission of the company.
Speaker 2:Um, that's the first thing. Secondly, it's much more transparent because the majority, almost all decisions that are being made in this case will be made at the token level, because in our case, the foundation council shouldn't be making decisions that the token holders haven't proposed in the first place. Now there'll be day-to-day operations that have to be done and that the token holders wouldn't want to be involved in and it wouldn't make sense for them to be involved in that decision making power. But the big decisions that are being made in our case, for example, where are we wanting to focus on establishing new banks? How many banks do we want to establish? How much capital raises do we want to do so? How many tokens do we want to issue this year? Stuff like that. That can all be made by the token community. So it just means decisions generally are much more transparent because the voting that's happening and the proposals are on chain it's not being done behind closed doors so you mean so for people who don't understand, on chain and behind closed doors.
Speaker 1:The traditional way would be this would be discussed in a board meeting that very little people would have access to, where there's much more visibility that if you wanted to see what was discussed and what was said, it would be available on chain it's.
Speaker 2:It's also the decision. The voting is on chain as well, so you can see the proposal. That's that's that's happened. You can see what's being decided and then you can see which token addresses effectively are voting one way or another, and you can see what's being decided and then you can see which token addresses effectively are voting one way or another and you can see the outcome. You can see the resolution and that can't be tampered with because it's on.
Speaker 1:How do you, how do you, deal with too many chiefs in the camp scenarios?
Speaker 2:so the first point is you have so you have this council, which is like a firewall as well, because if the proposal comes forward and it's going to have a negative impact, like it's an atrocious proposal, it should never have been put forward, um, and you've got a case of too many, too many cooks, effectively people trying to make decisions, and it's going to negatively hurt the project.
Speaker 2:You've got a council who can assess the proposal and give a second opinion on it and write a full report. If they disagree with it in some way because it's illegal or it's going to damage the project, they can write a full report and send that back to the token holders to to consider. So that's the first thing. Secondly, to, in order to write a proposal, there's going to to be various rules set up as to how you can actually propose things to the community for it to be voted on and discussed, and before it gets to the proposal stage, you have an informal discussion. That's again it's for the whole token community to do, to be part of if they want to be. So you shouldn't have a case where you're getting loads of proposals being put forward by different people for voting on because, like I said, these rules are going to be in place to prevent any one individual just putting any silly proposal forward that can hurt the project.
Speaker 1:Good, who can get behind us? People are interested on and getting behind the project, if you like the sound of this. What can they do?
Speaker 2:so we're not a. What I would say is we're not a crypto company, so you don't have to be a crypto enthusiast to get behind this. In fact, the majority of our supporters at the moment, and especially our investors, don't have significant crypto holdings. We have a few which are crypto investors, but the majority are traditional investors that this might be their first involvement or engagement with the Web3 space in terms of having a token or being involved in a token project. So this is very much open to, like I said, anyone to be supportive of. Anyone who sees the value that this brings and the importance of our mission can be supportive of it. And, like I said, the majority of our investors are traditional investors and this will be their first token project.
Speaker 1:If someone's thinking about investing, can they still get involved?
Speaker 2:yeah, definitely so.
Speaker 2:We're currently um raising 30 million euros. The majority of this is um for our tier one capital. So earlier we talked about the capital that a bank requires in order for it to operate and the first bank that we're setting up in lichtenstein, and our white paper goes through this in in a lot more detail in terms of the different phases of this project and how we're going to actually execute on our mission in order to set up community banks. But the first bank we're setting up in Lichtenstein requires capital for it to actually operate and for it to start functioning. So the majority of what we're raising is full capital for that bank. So we're in a 30 million fundraise at the moment and yet anyone can apply via the website to invest, and what we're keen is having people involved which are philosophically aligned with what we're doing. They want to be part of the project and part of the token community for the right reasons, and they're not just trying to join and leave within a few months or something like that, because that wouldn't work for this project.
Speaker 1:How do people follow along with what you're doing? How do they keep abreast of where you're at?
Speaker 2:So I'd say the best way is to subscribe on the website for our newsletter, um, where stuff like this our podcast will be shared with that newsletter. Our socials as well, um, twitter in particular. We are starting now to become more active on and um focusing more on our social media and our youtube channel as well. So we've got a youtube channel, um. This year that's that's going to be a big focus on getting more engagement with the community and with people who are interested in following the law.
Speaker 1:Yeah, great. Well, I think it's been great, oli. It's been good to go over. Is all economies created equal? Is banking just one thing? Is there a difference between big banks and small banks? We found out that there's a chasm that people wouldn't know about and how important small and medium-sized businesses really are, and they're desperate for something, and they're desperate for a relationship-based banking system that understands the dynamics of what it is that they're trying to do and that will impact supply chains and employees.
Speaker 1:So everyone from the you know the top to the bottom of the the ladder will can be affected by this. So it's a it's a powerful project that I think people should give attention to to, to see the power of what it is and what can become when this gets off the ground. So it's been great to have a chat with you today to go over all those little nuances that people probably wouldn't have understood, and that banks actually create money out of thin air. So they do have the magic money tree. It just isn't in the form that people think growing out the back garden with, you know, a pound notes growing off it, but it's not far away from that. So it's been great to have you on. It'd be great to do some more of these you know podcasts to explain what's going on.
Speaker 2:Keep track of Alhalla's progress, progress we can delve into the uh, the exciting world of neobanks as well, and the truth of neobanking and what they give us a hook.
Speaker 1:What's a neobank like? Tell us we can. We can set this up for the next one. Give us a quick summary on what a neobank is so neobank, also known as challenger banks.
Speaker 2:They tend to be digital focused, although sometimes they do offer some, uh, in-person banking, but they tend to be digital. Um. They are new banks that are on the scene, if you like, the new kids on the block, um, and they're offering and using technology, um to to cement the overall banking relationship and how customers interact with the bank tends to be using technology and digital in order to do things easier. So they have their role and they are certainly great for certain things, but are they doing SME lending and are they the solution that people think they are? Are they really going to be able to have an impact, a positive impact on the economy, or is it just a show, if you like? Is it just a trendy thing that is coming out? That's what we can delve into.
Speaker 1:Well, we can delve into that next time. It's been a pleasure having you on, so thanks for taking the time with us to go through the world of Valhalla. We'll find out where it started and where it's been a pleasure having you on, so thanks for taking the time with us to go through the world of Valhalla. We'll find out where it started and where it's likely to go in the future great thanks for watching.