WASHINGTON, March 21 (Reuters) – The speed at which depositors have fled Silicon Valley Bank (SIVB.O) this month – withdrawing $42 billion in 24 hours – has presented authorities with a new risk: the bank run triggered by social media.
Gone are the days when queues of people in front of banks served as a defining image of a lender on the brink. In today’s turbocharged digital age, customers can withdraw cash with just a few taps on their phone.
Reports on social media the week of March 6 that some venture capital firms, including influential investor Peter Thiel’s Founders Fund, were advising companies to divest money from tech-focused SVB plunged into a stock market crisis and sent clients into exit. Authorities close SVB on March 10th.
Switzerland’s Credit Suisse (CSGN.S), which had to be bailed out by arch-rival UBS (UBSG.S) in a state-led takeover on Sunday after a loss of investor confidence, knows the dangers of social media all too well. Over the past year, it has breached liquidity requirements at some of its units after an unfounded social media report led to customer exits.
“The fact that people can communicate so much faster… (has) changed the dynamics of bank runs and maybe also changed the way we need to think about liquidity risk management,” said Todd Baker, a senior fellow at Columbia University’s Richmond Center.
Billionaire hedge fund manager William Ackman warned days after the SVB collapse that “no bank is safe from a run” in a world of online bank accounts and social media unless the government gives depositors an explicit guarantee of “full access” to all of their checkout accounts.
Regulators know they are fighting the potential of bank runs, which could unfold faster than ever, although it’s unclear exactly how they will address the risk of Twitter-induced panic.
In the US, the decision to insure all bank deposits following the closure of the SVB caught many by surprise. Experts said it shows authorities are sufficiently concerned about depositors withdrawing cash from other lenders.
“It’s possible that the problem is that deposits have never moved so quickly, and that was the basis of this decision – the outflows at SVB have been unprecedented,” said Nicolas Veron, a senior fellow at the Peterson Institute for International Economics in Washington.
FAST DISAPPEAR
Some in the banking industry are downplaying the risks of another SVB-style downfall.
They point to SVB’s unique vulnerability to a social media-driven bank run, given its highly concentrated client base of technology and venture capital entrepreneurs mingling in the same circles.
“This was a center of influence that was focused on this ecosystem, unlike other areas,” said Randell Leach, chief executive officer of California-based Beneficial State Bank.
Still, some depositors around the world are taking no chances, even if they believe their bank is fundamentally sound.
A biotech investor in Germany, banked at Credit Suisse and speaking ahead of Sunday’s bailout deal, said he had switched his personal deposits to another institution, although he thought Credit Suisse was a “good bank.” The SVB has shown how quickly deposits can disappear, the investor said.
Dan Awrey, a law professor at Cornell University, blamed the “lack of a communication strategy” for the consequences of SCC.
Between SVB’s collapse on Friday morning and the end of the weekend, regulators should have said the bank had a unique business model and other lenders weren’t as risky, he said.
Failure to do so led depositors elsewhere to fear their funds were at risk, adding to stress in the system, Awrey said.
“All of that was just so lacking between Friday morning and Sunday for the Twittersphere to really grasp the information dynamic and narrative,” he added.
Other US regional banks have since come under pressure, with First Rebublic Bank’s FRC.N share price plummeting 47% on Monday amid concerns over its liquidity.
The SVB saga and non-stop speculation on social media could eventually result in banks offering 24/7 services, including weekends, said Jez Mohideen, CEO of Laser Digital, the cryptocurrency arm of Japanese bank Nomura.
Regulators also need to monitor social media and develop a set of protocols to guide their response, according to Patricia McCoy, a law professor at Boston College.
“They have to look for signs of unfounded rumours, panic is starting to spread on social media and they have to do this 24/7,” she said.
Reporting by Hannah Lang in Washington and Elisa Martinuzzi in London; additional reporting by Chris Prentice and Douglas Gillison in Washington and Elizabeth Howcroft in London; Adaptation by Tommy Reggiori Wilkes and Jonathan Oatis
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Hannah Lang
