The New Age of Bank Runs
Blame the smartphones and social media
In 1819, America suffered its first bank run. The FDIC did not exist and bank tellers were literally counting out cash before it was gone. The new age of bank runs is far different.
What previously took days, weeks, and months to play out in 1819 now takes hours or even minutes. All someone with a large Twitter following has to do is tweet that everyone should remove their money from Bank X and it’s off to the races. Close-knit industries like those in Silicon Valley and Manhattan real estate all communicate frequently on their smartphones. Information travels in seconds.
This new age dynamic contributed to the fast downfall of Silicon Valley Bank and Signature Bank before the federal government acted to calm the waters. Federal regulators like Jerome Powell’s Federal Reserve and Janet Yellen’s Treasury Department were caught unprepared. They clearly did not have risk models that accounted for smartphone and social media activity.
As someone who has worked on Wall Street trading floors, I can tell you that these regulators prioritize supervisory consistency. They want similarly situated financial institutions to receive similar scrutiny. It makes sense in part given similar risk profiles.
There’s a big problem with this approach, however.
It doesn’t account for speed. It values consistent regulatory approaches over nimble actions that mitigate emerging and immediate risks. So when faced with a tidal wave that will hit the shore in hours if not minutes, all they can do is hope and pray.
When the infamous Peter Thiel announced to the world that his company was removing its money from Silicon Valley Bank and urged other startups to do the same, federal regulators did not have the right tools to immediately address the chaos that ensued. It’s like a town not having its own fire department and instead relying on one from a city miles away.
A similar situation occurred with Signature Bank. That institution banked many landlords in New York City. Word traveled fast throughout that close-knit community that many of them were pulling deposits. Text. Tweet. Email. All in the palm of one’s hand.
Regulators were caught with their pants down. They reacted by guaranteeing all customer deposits at both institutions, but not until both institutions were insolvent. A liquidity crisis fueled by social media and smartphones had created a solvency crisis.
What can regulators do to address this new age of bank runs?
Disincentivize fear-mongering for one. This runs into First Amendment issues, and may not even be constitutional, but if someone with a large following on social media is sparking a bank run, we should consider whether there should be penalties for that behavior. There’s a big difference between raising concerns about an institution and telling everyone to pull their money. The latter veers into falsely “shouting fire in a crowded theater” territory.
Remember, what Silicon Valley Bank and Signature Bank did was not inherently risky banking activity. There are many writers, pundits, and talking heads who want you to think this is yet another example of out-of-control capitalists taking speculative risks. I explain in this article why that’s not the case. Many of those folks have never worked a day in finance or are unfortunately trying to push some agenda.
If Peter Thiel had simply expressed some reasonably held concern about Silicon Valley Bank’s financial position following the disclosure of its bond sale, I would have a completely different opinion. Instead, he created panic. He and anyone else acting in that manner should have some degree of liability.
If you disagree, tell me how this will not happen again. People with large social media followings should have to exercise a greater duty of care when communicating. Currently, it’s open season. Had the bank run not been sparked, Silicon Valley Bank or Signature Bank would likely still be here today.
Regulators may also need temporary control measures to slow or stop withdrawals
Similar to how stock exchanges halt trading after sudden price movements, banks need similar controls for deposits. It should be an option of last resort, but the goal would be the same as it is with exchanges.
Calm markets. Let depositors and investors breathe. Give the bank an opportunity to restore confidence before reopening.
There would obviously need to be clear standards in place on where and when this is allowed. We’re talking about everyday people’s money, after all. But even if it means regulators temporarily commandeering the banking ship for a day or two to make sure it hasn’t run aground, it’s better than a bank failing completely.
Many people valued their relationships with Silicon Valley Bank and Signature Bank. It’s easy to get swept up in the “all banks are bad” mantra, but by many accounts, both of these banks were contributing members of their communities. They were largely victims of the very technology that has made our lives easier and better connected.
I may not have all the answers for how the Federal Reserve, FDIC, and Treasury Department need to adapt to the new age of bank runs. What I do know is that the old supervisory regime is inadequate. Stress tests today must include social media bank run scenarios. Regulators need to keep watch in case influencers try to sow panic.
Otherwise, this new age of bank runs will keep running. With no end in sight.
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