Bank runs, reminiscent of the scene from “It’s a Wonderful Life,” used to involve frantic customers crowding together, demanding their money from an overwhelmed George Bailey. However, the recent collapse of Silicon Valley Bank bears little resemblance to that image, as it unfolded predominantly on Twitter, message boards, cell phones, and bank websites.
The collapse of Silicon Valley Bank was unique due to its rapid speed. The bank announced plans to raise fresh capital on a Wednesday afternoon, and by Friday morning, it was insolvent and under government control. Regulators, policymakers, and bankers are now examining the role of digital messaging and social media in the bank’s downfall and whether the psychological behaviour that drives bank runs — depositors’ fear of losing their savings — might be intensified and spread faster in the digital age.
As a professor at the University of California-Irvine’s Paul Merage School of Business, Michael Imerman characterized the event as a sprint rather than a race, utilizing social media as a critical component. According to the Federal Deposit Insurance Corporation, one-fifth of Silicon Valley Bank’s deposits were withdrawn in just a few hours, which shut the bank down earlier than usual.
The collapse of Silicon Valley Bank occurred in the digital era, as opposed to other well-known bank failures like IndyMac or Washington Mutual in 2008. Depositors primarily used bank apps and phone calls to withdraw their money quickly. The bank run began on private message boards and Slack channels, where entrepreneurs encouraged each other to pull their funds from the bank.
The speed at which information and money move in today’s world played a significant role in the rapid collapse. As news broke that venture capitalist Peter Thiel was advising his investments to close their accounts with Silicon Valley Bank, the situation escalated.
Bank runs, which often begin as rumours and can quickly devolve into collective fear, have become much rarer since the creation of the FDIC in 1933. However, the entire banking industry now faces the reality that it could be the next target of a social media-fueled bank run, similar to the 2021 “meme stock” boom.
Government response to the Silicon Valley Bank failure protected depositors’ funds and prevented further bank runs fueled by social media. Policymakers are now exploring potential solutions to avoid similar incidents in the future, such as the decades-old concept of a bank holiday.
In the aftermath of the Silicon Valley Bank failure, financial institutions, regulators, and policymakers are working to develop strategies to safeguard against similar incidents in the future. The idea of a bank holiday has gained some attention among these strategies. As depicted in “It’s a Wonderful Life,” a bank holiday involves temporarily closing a bank to allow cooler heads to prevail and prevent a run fueled by panic and misinformation.
Another approach to address the challenges posed by the digital era involves enhancing banks’ communication strategies. Banks must establish a solid social media presence to respond swiftly and effectively to any rumours or misinformation that could trigger a bank run. In addition, banks should consider investing in advanced technology to monitor social media platforms and detect early warning signs of potential threats.
Collaboration between banks, regulators, and technology companies is crucial in addressing the challenges of the digital era. By working together, these stakeholders can develop innovative solutions, such as real-time risk assessment tools and predictive analytics, to identify and mitigate potential threats before they escalate.
Financial education for the public is another crucial factor in preventing social media-fueled bank runs. By promoting a better understanding of the banking system and the role of organizations like the FDIC, individuals may be less prone to act on panic and misinformation. Educational campaigns and resources can be shared through social media platforms, reaching a wider audience and fostering financial literacy.
The digital era has accelerated the speed at which bank runs can unfold, posing new challenges for financial institutions, regulators, and policymakers. Addressing these challenges will require a multifaceted approach, including bank holidays, enhanced communication strategies, technological innovations, and financial education for the public. By working together, stakeholders can create a more resilient financial system in the face of the rapidly evolving digital landscape.
