Bank runs used to be slow. The digital era sped them up

NEW YORK (AP) — A bank run conjures images of “It’s a Wonderful Life,” with anxious customers crammed shoulder to shoulder, desperately pleading with a harried George Bailey to hand over their money.

The failure of Silicon Valley Bank last week had the panic but few other similarities, instead taking place on Twitter, message boards, mobile phones and bank websites.

What made the failure of Silicon Valley Bank unique compared to past failures of large banks was how quickly it collapsed. Last Wednesday afternoon, the $200 billion bank announced a plan to raise fresh capital; by Friday morning it was insolvent and under government control.

Regulators, policymakers and bankers are looking at the role that digital messaging and social media may have played in the collapse, and whether banks are entering an age when the psychological behavior behind a bank run — mass fear from depositors of losing their savings — may be amplified and go viral quicker than bank officers and regulators can successfully respond.

“It was a bank sprint, not a bank run, and social media played a central role in that,” said Michael Imerman, a professor at the Paul Merage School of Business at the University of California-Irvine.

The Federal Deposit Insurance Corporation estimates that customers withdrew $40 billion — one fifth of Silicon Valley Bank’s deposits — in just a few hours, prompting the agency to shut down the bank before 12 p.m. ET, instead of waiting until the close of business, which is typical operating procedure for regulators when a bank runs short of money.

Some other well-known bank failures, such as IndyMac or Washington Mutual in 2008 or Continental Illinois in the 1980s, only happened after days or weeks of reports indicated those banks faced deep financial difficulties. Then a run occurred and regulators stepped in.

The Silicon Valley Bank run was, in many ways, the first of the digital era. Few depositors lined up at a branch. Instead, they used bank apps and phone calls to access their money in minutes. Venture capitalists and business owners described the early stages of the Silicon Valley run being led by private message boards or Slack channels, where entrepreneurs were encouraged to withdraw their funds.

Silicon Valley Bank also was unique in being almost entirely exposed to one community — the tech industry, venture capital and startups. When this close-knit community of depositors talked to one another — using digital channels to do so quickly — the bank likely became more vulnerable to rumors and a run. This was a risk outside of the growth of social media, industry experts said.

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Sam Altman, CEO of Open AI, tweeted: “the speed of the world has changed. things can unwind fast. people talk fast. people move money fast.”

While the withdrawals initially may have been orderly, they became a full-on bank run Thursday evening after the news spilled over to Twitter that billionaire venture capitalist Peter Thiel had advised his invested companies to close their accounts with Silicon Valley Bank.

“If you are not advising your companies to get the cash out, then you are not doing your job as a Board Member or as a Shareholder. Daily life in startups is risky enough, don’t play with your lifeline…,” wrote Mark Tluszcz, the CEO of Europe-based investment firm Mangrove, on Twitter that Friday morning.

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For David Murray, the warning of the first bank run of the social-media age came in a one-sentence email.

He’s a co-founder of Confirm.com, an employee performance management company in San Francisco that had millions of dollars sitting in accounts at Silicon Valley Bank.

Murray received a terse email Thursday morning saying that a run was underway there and recommending everyone pull their money out immediately. The email came from an investor whom Murray hears from so infrequently that his co-founder wondered if it was a phishing attempt or other scam.

After verifying the email and seeing the steep drop in the stock price of the bank’s parent company, SVB Financial, Murray and his colleagues rushed to withdraw the company’s money. Instead of heading to a branch, they quickly pulled up a webpage and logged in. It took a few tries, but they eventually moved every cent to an account at a different bank within a half hour.

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Murray could see fear rising among other startup companies in real time.

“We have a trusted network of founders” of startup companies who communicate with each other over Slack, Murray said. “Normally these chat groups are dead. But that day, all the Slack groups were lit up.”

As depicted with the fictional Building and Loan in ” It’s a Wonderful Life,” runs on a bank often start off as a rumor and can quickly devolve to a tribal-like collective fear that sends depositors clamoring for their money, even when nothing is wrong. Because a bank run can happen at random and is hard to stop once started, the U.S. government created the FDIC to stop future bank runs under the premise that depositors’ funds would be insured.

Between 1930 and 1933, during the Great Depression, roughly 9,000 banks failed. Since the FDIC’s creation in 1933, bank runs have become much rarer. According to the FDIC, there were 562 bank failures between 2001 and 2023, with the vast majority of those happening during the 2007-2009 recession.

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The entire banking industry is now grappling with the fact that they could be the next target of a social media-fueled bank run. The hive-like behavior is similar to what happened during the 2021 “meme stock” boom where companies were targeted by groups of mostly retail investors, although in that case groups of investors were using social media to push stocks higher.

Silicon Valley Bank’s failure dominated social media platforms for days. Several prominent investors issued bombastic predictions that if the federal government did not step in to make all Silicon Valley Bank depositors whole — both insured and uninsured — there would be more bank runs on Monday.

In the end, Washington capitulated. Under the plan announced by U.S. regulators on Sunday, depositors at Silicon Valley Bank were able to access all their money. A new Federal Reserve program will allow banks to post certain high-quality securities as collateral and borrow from a government emergency fund. Both Treasury and Federal Reserve officials told reporters over the weekend that the programs were created in part due to concerns further bank runs — fueled by social media — could occur.

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“The last several days represent a unique incident fueled by misinformation on social media and are not indicative of the health of our industry,” said Lindsey Johnson, president of the Consumer Bankers Association, in a statement.

For policymakers, there doesn’t appear to be any immediate solution. One possibility that’s been around for decades — also depicted in “It’s a Wonderful Life” — is the idea of a bank holiday where regulators close a bank for a few days to allow for cooler heads to prevail.

On Monday after the government stepped in to backstop the banking system, it seemed like a portion of the technology community had become aware of their ability to cause mass panic in finance and should be more careful when posting about the potential health of banks.

“In the age of social media, if you have a big enough platform and yell loud enough about a bank run, you might eventually be correct. Doesn’t make it right,” wrote Logan Bartlett with Redpoint Ventures.

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An earlier version of this report incorrectly said Confirm.com was required to bank with Silicon Valley Bank by its financial backers.