BNY released its third quarter earnings late last week, and the giant custodial bank discussed money markets, stablecoins and tokenized money markets on its earnings call. President & CEO Robin Vince tells us, "Our early commitment to the digital asset space, paired with the principles of safety, scalability and innovation that have defined BNY for centuries, now positions us to support the growing institutional adoption of digital asset products. In just one example from this past quarter, OpenEden, a leading platform for the tokenization of real-world assets, headquartered in Singapore, appointed BNY as investment manager and primary custodian for the underlying assets of its flagship Tokenized U.S. Treasury Bills Fund."
He explains, "As global capital markets move toward an always-on operating model, blockchain technology and digital asset adoption are becoming important enablers. In a meaningful step toward enhancing the utility of money market fund shares, we announced a collaborative initiative with Goldman Sachs to maintain on blockchain technology, a mirror record of customers' ownership of select money market funds, live and available through our LiquidityDirect platform. This includes a new token-enabled share class of our own BNY Investments, Dreyfus Treasury Securities Cash Management Fund. We are encouraged by developments in the U.S. regulatory landscape that will further enable tokenized products and allow us to support clients as they consider moving to a more 'on chain' financial world."
BNY CFO Dermot McDonogh comments on "Net interest income of $1.2 billion was up 18% year-over-year and up 3% quarter-over-quarter. Sequentially, net interest income increased due to reinvestment of maturing securities at higher yields, partially offset by changes in deposit mix. Average deposit balances were flat sequentially, as the typical seasonal decline over the summer was offset by idiosyncratic client balances related to CLO activity and M&A escrows. Noninterest-bearing deposits grew by 3% and interest-bearing deposits were down by 1% quarter-over-quarter. Accordingly, average interest-earning assets were also flat sequentially. Cash and reverse repo balances decreased by 2%, loans increased by 2% and investment securities balances increased by 1% quarter-over-quarter."
He continues, "Turning to Investment and Wealth Management.... In the third quarter, we saw $33 billion of net outflows from long-term strategies and $34 billion of net inflows into Cash." In response to a question, he says, "When I was going through ... what we now fondly call the 'tripod' within the firm, which is Laide, who runs our deposit platform, Tiffany, who is our Treasurer; and Jason, who is our CIO.... Our balance sheet is very clean, it's very liquid, and we talk a lot about the $1.7 trillion liquidity funnel that we have. Every day, when we come in, we see this funnel, and we can see where we can help clients maximize the return on their cash and at the same time, optimize our deposit mix and where we are."
McDonogh states, "And I think the reason for the strength in NII this quarter was really around that. And in my prepared remarks, and if you reflect back and when I talked about it on the Q2 call, we said Q3 was going to be a tough comp given last year in terms of there was a lot of activity. This year, we did see some seasonal decline in deposits, but that was more than offset by a pickup in ... capital markets activity, strong activity in the CLO space, and we're able to serve clients in a very differentiated way."
During the Q&A, David Smith of Truist Securities asks, "You mentioned some potential turbulence and headwinds to the money market ecosystem coming up right now with the rise of stablecoins on the one hand, coming amidst the backdrop of falling rates. Do you think either of these could put pressure on fee rates because this is an area of the fund space that's seen less pressure than equities and fixed income over the last decade or two?"
Vince replies, "I would not describe what's been happening as turbulence. I would regard it as, frankly, as opportunity. You're right, the money market funds have reached record levels, essentially rounding to $8 trillion, making new highs pretty much each quarter. And we're in that business, but we're in that business from lots of different angles. And I think it's worth reflecting on it for a second because we're there with our Dreyfus Money Market Funds ... rounding, call it, $450 billion. That's a significant participation. But then we're also participating with our LiquidityDirect business. We're participating with our collateral businesses. We're participating with our custody businesses. We're participating with our trustee businesses. And so, this is another example of an industry, which we touch very broadly across all of our different platforms."
He continues, "Now there's an evolution, and we're talking about on-chain capabilities for money market funds. I don't view that as a turbulence for them, I view that as a technological evolution. And the question is, do we have platforms that can serve that technological evolution? The answer is yes because of our investment in digital assets. And so our ability to help manage that transition from traditional money market funds to a more digital asset money market fund is something that we've clearly set out that we can do. And that's not dissimilar to the mutual funds to ETF to separate accounts evolution of market structure. It's not threatening when market structures evolve, unless you can't catch the next evolution. And so, we've invested to be able to catch it."
Vince then says, "Now on top of that, we now have stablecoins. And you're right, they can be a competitor to a money market fund, but they are very similar to a money market fund. Essentially, it's a collection of high-quality assets, but they have the additional feature of mobility. And we are in the mobility business because we have our Treasury Services businesses. We have our clearing businesses. We have our collateral management businesses. And so being in the transaction mobility business, actually gives us a new feature that doesn't exist for money market funds because they aren't mobile assets."
When asked if BNY would issue a stablecoin, he answers, "So we're not going to get into very specific situations about future products. But I would just pull you back to the broader comment, which is we are in the infrastructure capital markets enablement business. We're in the rails business. We partner with stablecoins. We enable other people's stablecoins. And that's really the heart of our strategy, to enable our clients with their transition into these ecosystems. We support the biggest stablecoin issuers today. There are many people who are interested in launching stablecoins. We really have the complete set of services to be able to power them."
Vince says, "And what I would expect to see over time is participants who are wanting to do their own versions of using stablecoins internally to be able to operate their companies, but they won't have the scale or the interest in creating all the infrastructure. And so they're going to turn to other stablecoin providers, and they're going to turn to partners to be able to power their own use of those things. And I think that's the sweet spot of how we think about the business opportunity."
Finally, he adds, "For us, it's about enabling the stablecoin ecosystem. And the way in which I think we're going to be able to best do that is provide the capabilities for stablecoins to be able to thrive and help other people be able to make their stablecoins thrive. Now there may be a lot of things that we have to build right up to the point of 'is it a BK stablecoin?' So, you could imagine a world where other people's stablecoins might be running on rails and capabilities that we provide, or we might be helping existing stablecoin issuers to be able to insert their products into other people's ecosystems as this connector across cash collateral, the mobility of money and then the infrastructure and capital markets. That's how I would think about it. But I'm not definitively answering your question because we'll remain agile to these questions over time."
