The bank run — the wholesale fear of savers losing their savings — conjures up images from It’s a Wonderful Life, as anxious customers huddle, frantically begging a beleaguered George Bailey to hand over their money.

The bankruptcy of Silicon Valley Bank last week caused the same panic, but few other similarities to what happened on Twitter, messaging platforms, mobile phones and banking websites.

The Silicon Valley bank failure differed from previous major bank failures in how quickly it collapsed. This past Wednesday afternoon, the $200 billion bank announced a plan to raise new capital – as of Friday morning it was insolvent and under government control.

Regulators, policy makers and bankers are examining the role that digital messaging and social media may have played in the crash, and whether banks are entering an era where the psychological behavior behind a bank run could intensify and spread faster than bank officials and regulators. . respond successfully.

“It was a banking sprint, not a bank run, and social media played a central role in that,” said Michael Imerman, a professor at UC Irvine’s Paul Mérej School of Business.

The Federal Deposit Insurance Corporation estimates that customers withdrew $40 billion – a fifth of the Silicon Valley bank’s deposits – in just a few hours, prompting the agency to close the bank by 12 noon rather than wait until business hours are standard. the procedure for the work of regulatory bodies in the event of a shortage of cash in the bank.

The failure of some other prominent banks, such as IndyMac or Washington Mutual in 2008 and Continental Illinois in the 1980s, came after days or weeks of reports that these banks were in serious financial trouble. Then there was a bank run and regulators stepped in.

The mass withdrawal at a Silicon Valley bank was in many ways a first in the digital age. Several depositors stood in line at the branches. Instead, they used banking apps and phone calls to access their money in minutes. Venture capitalists and business owners have described the early stages of Silicon Valley banking as driven by platforms or other channels through which entrepreneurs were encouraged to withdraw their capital.

Silicon Valley Bank was also unique in that it was open almost entirely to one particular community—the tech industry, venture capital, and startups. When this tight-knit community of savers communicated with each other using digital channels to do so quickly, the bank likely became more vulnerable to rumors and bank runs.

Sam Altman, CEO of Open AI, tweeted: “The speed of the world has changed. Things can move quickly. People converge quickly. People are transferring money quickly.”

While the withdrawals might have been smooth at first, they turned into a full-blown banking operation Thursday night after news spread on Twitter that billionaire entrepreneur Peter Thiel advised companies he has invested in to close their accounts with Silicon Valley Bank.

“If you are not advising your companies to cash out, then you are not doing your job as a board member or as a shareholder. Everyday life in startups is dangerous enough, don’t play with your lifeline,” Mark Tluz, managing director of European investment firm Mangrove, tweeted on Friday morning.

For David Murray, the warning of the first bank run in the age of social media came in an email—in just one sentence.

He co-founded Confirm.com, a San Francisco-based employee performance management company that had millions of dollars in Silicon Valley Bank accounts.

On Thursday morning, Murray received a brief email informing him that the bank was being run over and advising everyone to withdraw their money immediately. The email came from an investor Murray rarely hears about, so the co-founder wondered if it was a phishing attempt or just another scam.

After checking email and seeing that the share price of the bank’s parent company, SVB Financial, had plummeted, Murray and his colleagues rushed to withdraw the company’s money. Instead of going to the branch, they were immediately connected to the site. It took several tries, but they ended up transferring every cent to another bank account within half an hour.

Murray has witnessed a growing fear among other real-time startups.

“We have a trusted network of founders” of startups who communicate with each other via Slack, Murray said. “Usually these chat groups are dead. But on that day, all the teams in Slack were alive.”

As shown in the movie It’s a Wonderful Life, bank runs often start out as rumors and can quickly escalate into a collective fear that drives savers to demand their money even when nothing is happening. Because bank runs can happen by accident and are difficult to stop once they start, the US government created the FDIC to stop future bank runs, as long as depositors’ funds are insured.

Between 1930 and 1933, during the Great Depression, about 9,000 banks failed. After the creation of the FDIC in 1933, banking “explosions” became much less frequent. According to the FDIC, there were 562 bank failures between 2001 and 2023, the vast majority of which occurred during the 2007-2009 recession.

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

The Silicon Valley bank failure dominated social media for days. Several prominent investors have made sweeping predictions that unless the federal government intervenes to compensate all Silicon Valley bank depositors — insured and uninsured — there will be more banking “explosions” on Monday.

In the end, Washington capitulated. Under a plan announced by US regulators on Sunday, Silicon Valley Bank depositors have access to all their money. A new Federal Reserve program will allow banks to pledge certain securities as collateral and borrow from the government’s emergency fund. Treasury Department and Federal Reserve officials told reporters over the weekend that the programs were created partly out of fear that further social media-fueled bank runs could occur.

“The last few days represent a one-off incident caused by misinformation on social media that is not indicative of the health of our industry,” Consumer Banks Association President Lindsey Johnson said in a statement.

For politicians, there doesn’t seem to be an immediate solution. One possibility that has been around for decades — also depicted in the movie It’s a Wonderful Life — is the idea of ​​a bank holiday, where regulators shut down a bank for a few days to ensure peace of mind.

On Monday, after the government stepped in to bail out the banking system, it appeared that parts of the tech community had realized their ability to cause massive financial panic and should be more careful when publishing information 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 robbery, you might be right. That doesn’t mean it’s right,” wrote Logan Bartlett of Redpoint Ventures.

Source: Associated Press.