Silicon Valley Bank: How a Digital Bank Run Accelerated the Collapse

The Silicon Valley Bank collapse, the second largest bank collapse in US history, took place in less than 48 hours.

Customers withdrew $42 billion in a single day last week — nearly a quarter of the bank’s total deposits.

The rapid bank run has raised questions about the fragility of financial institutions in a digital environment characterized by easy cash withdrawals and the dissemination of information on social media and other online spaces, where the panic of a few has turned into a run on the exit can be extended.

One such possibility, known as a digital bank run, increases the risk of sudden, widespread cash withdrawals, particularly among a group of depositors who share an industry and social ties — like Silicon Valley Bank’s depositors, experts told ABC News.

“This was the first Twitter-powered bank run,” Rep. Patrick McHenry, RN.C., the chairman of the House Financial Services Committee, said in a statement days after the Silicon Valley bank fall.

The group of depositors at Silicon Valley Bank consisted of a relatively small group of venture capital firms, technology startups, and other large investors.

After a sad financial report sparked concern last Wednesday, some of the depositors discussed their reactions in WhatsApp and Slack groups dedicated to startups, The Wall Street Journal reported.

Meanwhile, several prominent venture capitalists and other big investors took to Twitter to voice their concerns, adding to fears of a collapse.

Michael Burry, an investor best known for predicting the subprime mortgage crisis, warned in a now deleted tweet: “It’s possible that we found our Enron today.”

On Thursday, shares of Silicon Valley Bank fell 60% in response to concerns about the bank’s struggling financial condition.

In the early afternoon, the bank’s sudden demise took over online discussions among startup founders, according to entrepreneur Alexander Torrenegra.

“All my chats with tech founders in the US are sparked by what’s happening,” Torrenegra told on twitter. “Obviously we have a bank drain. Surreal.”

Founders Fund, a venture capital fund led by billionaire investor Peter Thiel, withdrew all of its deposits that day, Bloomberg reported.

Because the bank is FDIC-insured, depositors were guaranteed up to $250,000 in cash for various types of accounts in the event of a collapse. However, many depositors at Silicon Valley Bank had accounts well in excess of $250,000, raising the stakes for those who failed to withdraw their funds ahead of a possible bank failure.

“Because information comes out faster, you get the information in real-time, it’s widely shared, and it prompts people to take action,” Duke University finance professor Campbell Harvey told ABC News. “If you’re the first group, you’ll get 100% of your money, and if you’re the last group, you might get zero.”

Hilary Allen, a professor at American University’s Washington College of Law who studies banking regulation, said the relatively small and tight-knit community of bank depositors helped accelerate the decline.

“Virtually all depositors were from the same community and a community that was very online,” Allen told ABC News. “When you have something like Silicon Valley Bank, where the vast majority of depositors are in the tech industry and they’re very connected and everyone is talking to each other, that’s the kind of setting where a panic can really, really thrive. “

Certainly investors who fled the bank had well-founded concerns about their financial health.

Silicon Valley Bank had increased investments in long-dated government and mortgage bonds, which typically provide small but reliable returns when interest rates are low. However, when the Federal Reserve aggressively raised interest rates last year, these holdings depreciated significantly.

A day before the big cash withdrawal, Silicon Valley Bank announced that it lost $1.8 billion selling those distressed bonds.

“This is not a pure bank run,” Itamar Drechsler, a professor of finance at the University of Pennsylvania’s Wharton School of Business, told ABC News. “The bank had a very fundamental problem.”

Still, the speed and reach of online communications likely hastened the bank’s collapse, Dreschler said.

“Like a crowd moving together very quickly, there’s a problem when they decide to get off somewhere,” Dreschler said. “If we coordinate more across social media and other information technologies, it can make the crowd move much faster.”

While digital banking allows for quick and easy withdrawals, the availability of such a service likely contributed little if at all to the bank run, as this technology has existed for many years without any notable problems, the experts said.

“People have been talking for a while about whether the speed of digital banking itself would contribute to bank runs,” said Allen of American University. “I think it’s been relatively easy to get your money out for a while now. I’m not sure how much of a difference that made.”

Finally, in response to the outcry and fears of the crisis spreading further, the FDIC, Treasury Department and Fed took a big step Sunday by telling Silicon Valley bank depositors that the FDIC would protect all of their funds, including those that exceed the $250,000 limit.

Later that day, the Fed announced an emergency lending program to cover the deposits in question and restore confidence in the financial system.

The spread of panic online may have contributed to the federal government’s decision to take such extraordinary measures to prevent uncertainty from penetrating further into the financial system, Allen said.

“Was that part of the concern that motivated the Biden administration to step in, fearing that the very public venting on Twitter could spill over to other banks as well?” she asked.

On Monday, in a morning White House address, President Joe Biden tried to reassure Americans that the banking system was healthy.

“Americans can rest assured that our banking system is secure,” Biden said. “Your deposits are safe. Let me also assure you that we will not stop there. We will do what is necessary.”

Biden also addressed the issue in a that day Twitter post.

ABC News’ Libby Cathey contributed to the coverage.

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