Stock Market

SVB’s sudden collapse wasn’t a social media triggered ‘Twitter run.’ It’s what people always do when their money is threatened.

One prevalent narrative spreading in Silicon Valley is that we are witnessing a new type of bank run — a “Twitter run” — driven by technological innovations in banking and direct messages on social media. Nervous venture capitalists encouraged their tech-startup clients to abandon their long-time, valued business partner, Silicon Valley Bank

en masse, so the narrative goes.

This seems to imply that the $42 billion single-day withdrawal of deposits from SVB could have been prevented if technology had not forced the bank’s hand. 

The truth is that what happened at SVB is an old-fashioned bank run. While rumors now spread on the internet, the speed at which banks are run has mostly remained the same.

Why is that? It is not technology per se that drives the speed of a run, but rather how quickly people agree on a new set of beliefs about the state of banks. When enough people believe that the world is different today than yesterday, that’s when runs happen.

The most common belief that leads to a bank run is that a bank is insolvent. Concerns about SVB’s solvency began when it announced on Wednesday, March 8, that it had lost roughly $1.8 billion on its bond portfolio and was selling equity — which many depositors or their advisers took as a harbinger of looming insolvency. Heavy deposit withdrawals began the next day and lasted for two days before SVB was shuttered by the FDIC.

Read: From SVB’s sudden collapse to Credit Suisse’s fallout: 8 charts show turbulence in financial markets

Things were no different in the past. Take the case of the fruit-fly panic of 1929. At that time, in early 1929, Florida’s economy was hit by an unexpected, massive fruit fly infestation that led to a statewide quarantine and spelled doom for growers of oranges, grapefruit, and many other crops. Florida residents realized that nearly all banks in the state lent heavily to citrus growers, which led to concern about the banks’ solvency and the safety of their deposits.

The suspension of Citizens Bank and Trust in Tampa triggered bank runs throughout the state. In its wake, and without additional cash and outside liquidity support to arrest the bank runs, half of the banks in the state only had enough cash and reserves on hand to stay open for a day. The rest would have closed in another day. 

This disaster scenario was only averted due to the fast actions of the Atlanta Federal Reserve Bank. The Atlanta Fed stopped this panic by sending cash the day of Citizens Bank’s failure to banks in Miami and Tampa via “currency depots.” The Deputy Governor of the Atlanta Fed pronounced that it was “prepared to send enough money to pay every depositor” of the two large remaining banks that were facing heavy withdrawals. This calmed nervous depositors and stopped the panic.

Another classic example of the speed at which panics arose in the past occurred in 1932 in Chicago. When city officials announced that Congress had rebuffed their request for $80 million in aid to the city, the bank runs began, with newspapers reporting that “even healthy banks were affected.”

Just like in the classic film “It’s a Wonderful Life,” the CEO of one of the affected banks, First Chicago, stood up on a pillar in the lobby and announced to the throngs of depositors scrambling for cash that they need not fear because truckloads of money were on their way from the Fed, (even as First Chicago still had $25 million of cash on hand). The runs peaked a day later, but not before causing the failure of 26 of Chicago’s weakest banks. 

The vast majority of Chicago’s banks (including First Chicago) were saved by the local Federal Reserve Bank of Chicago and New York banks coming to their rescue. Depositor confidence was further restored when major banks published their financial conditions in local newspapers in the week following the run. 

This confidence-bolstering game should sound quite familiar to those following events of the past week. Today’s playbook thus far includes a new lending facility aimed at providing cash-poor banks with the liquidity they need to stave off runs (the Bank Term Funding Program), interbank cooperation to stave off problems at First Republic Bank
and pronouncements by the FDIC and Fed that uninsured deposits will be covered at SVB and Signature Bank

— all straight out of  the historical playbook.

Bank runs can thus stop as quickly as they begin – once depositors reset their beliefs and decide that their deposits are safe. There is nothing special about today’s technology. It is simply the speed at which depositors come to the realization that a bank might not be solvent or that their deposits are safe that drives panics and their resolution.

SVB’s management needs to explain why its risks weren’t hedged.

If solvency is critical, important questions need answers. Good management of a bank requires attention to details and considerations of tail risk, such as the possibility that the Fed might dramatically raise rates in response to a post-COVID surge in inflation, leading to potential losses on the bank’s fixed income portfolio.

SVB’s management needs to explain why these risks weren’t hedged and why bank regulators and examiners did not see these risks and highlight them before the bank was run. But these are age-old questions for old fashioned bank runs, not new questions about new-fangled bank runs. This time is not different.

Joseph R. Mason was formerly a senior financial economist at the Office of the Comptroller of the Currency (a bureau of the U.S. Treasury) and is currently a professor of finance at Louisiana State University and a fellow at the University of Pennsylvania’s Wharton School. Kris James Mitchener is the Robert and Susan Finocchio Professor of Economics at the Leavey School of Business, Santa Clara (Calif.) University, research associate at the National Bureau of Economic Research (NBER) and research fellow at the Centre for Economic and Policy Research (CEPR) and CESifo.

Read: SVB’s collapse exposes the Fed’s massive failure to see the bank’s warning signs

Plus: SVB’s failure proves the U.S. needs tighter banking regulations so that all customers’ money is safe

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