03/14/2023
SANTA CLARA, Calif.–The recent failures of two large banks has made clear there is a new threat to financial institutions of all types—the “silent run” on deposits.
As a number of analysts have made clear, including one person who shared thoughts with CUToday.info, while rising rates and mismatched investment portfolios are commonly cited as the reasons for the failure of Silicon Valley Bank, the biggest reason for its downfall was a lack of confidence, which resulted in the run on deposits.
Former Treasury Secretary Larry Summers’ tweet on what led to collapse of bank.
But while in prior eras “runs” were public and visible to all as lines formed outside bank/S&L branches, the run on Silicon Valley Bank occurred largely online and through mobile devices.
“The massive amount of customer withdrawals that led to the collapse of
Silicon Valley Bank had all the hallmarks of an old-fashioned bank run,
but with a new twist befitting the primary industry the bank served:
much of it unfolded online,” noted CNN. “Customers withdrew $42 billion
in a single day last week from Silicon Valley Bank, leaving the bank
with $1 billion in negative cash balance, the company said in a
regulatory filing. The staggering withdrawals unfolded at a speed
enabled by digital banking and were likely fueled in part by viral panic
spreading on social media platforms.”
The Wall Street Journal added that reportedly the panic was also taking place in private chat groups.
‘Twitter-Fueled Bank Run’
“In the day leading up to the bank’s collapse, multiple prominent venture capitalists took to Twitter in particular, and used their large platforms to raise alarms about the situation, sometimes typing in all caps,” the Journal report stated, adding that some tech company founders and CEOs then shared tweets about the concerning situation at the bank in private Slack channels.
Meanwhile, reported CNN, “On the other side of a screen, startup leaders raced to withdraw funds online – so many, in fact, that some told CNN the online system appeared to go down. Still, the end result was a modern race to withdraw funds, which House Financial Services Chair Patrick McHenry later described in a statement as ‘the first Twitter fueled bank run’.”
‘So Destabilizing’
Ben Thompson, an analyst who tracks the tech industry, wrote in a post earlier this week, “What made the Silicon Valley Bank run unique was (1) the ease with which its customers could execute withdrawals and (2) the speed with which news of Silicon Valley Bank’s impending demise spread. It was the speed, fueled by zero distribution costs for both rumors and withdrawals, that was so destabilizing.”
The irony, of course, was that it was the same Silicon Valley companies whose deposits were at risk that created much of the technology that aided the silent bank run.
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