Digital era may speed up Silicon Valley Bank collapse: Experts

Anxious customers crammed shoulder to shoulder as they are pleading with a harried George Bailey to hand over their money. The Silicon Valley Bank collapse last week has the panic but few other similarities, instead taking place on Twitter, message boards, mobile phones, and bank websites.

What made the failure of Silicon Valley Bank unique compared to past failures of large banks was how quickly it collapsed. Last Wednesday afternoon, the $200 billion bank announced a plan to raise fresh capital; by Friday morning it was insolvent and under government control.

Regulators, policymakers, and bankers are looking at the role that digital messaging and social media may have played in the collapse, and whether banks are entering an age when the psychological behavior behind a bank run — mass fear from depositors of losing their savings — may be amplified and go viral quicker than bank officers and regulators can successfully respond.

Michael Imerman, a professor at the Paul Merage School of Business at the University of California-Irvine said, “It was a bank sprint, not a bank run, an social media played a central role in that.”

The Federal Deposit Insurance Corporation estimates that customers withdrew $40 billion — one-fifth of Silicon Valley Bank’s deposits — in just a few hours, prompting the agency to shut down the bank before 12 pm, instead of waiting until the close of business, which is the typical operating procedure for regulators when a bank runs short of money, according to The Associated Press.

Some other well-known bank failures, such as IndyMac or Washington Mutual in 2008 or Continental Illinois in the 1980s, only happened after days or weeks of reports indicating those banks faced deep financial difficulties. Then a run occurred and regulators stepped in.

In many ways, the Silicon Valley Bank run was the first of digital era. A few depositors lined up at a branch. Instead, they used bank apps and phone calls to access their money in minutes. 

Venture capitalists and business owners described the early stages of the Silicon Valley run as being led by private message boards or Slack channels, where entrepreneurs were encouraged to withdraw their funds, AP reported. 

Silicon Valley Bank also was unique in being almost entirely exposed to one community — the tech industry, venture capital and startups. When this close-knit community of depositors talked to one another — using digital channels to do so quickly — the bank likely became more vulnerable to rumors and a run. This was a risk outside of the growth of social media, industry experts said.

Sam Altman, CEO of Open AI, tweeted: “the speed of the world has changed. things can unwind fast. people talk fast. people move money fast.”

“If you are not advising your companies to get the cash-out, then you are not doing your job as a Board Member or as a Shareholder. Daily life in startups is risky enough, don’t play with your lifeline...,” wrote Mark Tluszcz, the CEO of Europe-based investment firm Mangrove, on Twitter that Friday morning.

For David Murray, the warning of the first bank run of the social-media age came in a one-sentence email. He’s a co-founder of Confirm.com, an employee performance management company in San Francisco that had millions of dollars sitting in accounts at Silicon Valley Bank.

Murray received a terse email Thursday morning saying that a run was underway there and recommending everyone pull their money out immediately. The email came from an investor whom Murray hears from so infrequently that his co-founder wondered if it was a phishing attempt or other scam.

After verifying the email and seeing the steep drop in the stock price of the bank’s parent company, SVB Financial, Murray and his colleagues rushed to withdraw the company’s money. 

Instead of heading to a branch, they quickly pulled up a webpage and logged in. It took a few tries, but they eventually moved every cent to an account at a different bank within a half hour.

Murray could see fear rising among other startup companies in real-time.

“We have a trusted network of founders” of startup companies who communicate with each other over Slack, Murray said. “Normally these chat groups are dead. But that day, all the Slack groups were lit up.”

The entire banking industry is now grappling with the fact that they could be the next target of a social media-fueled bank run. The hive-like behavior is similar to what happened during the 2021 “meme stock” boom where companies were targeted by groups of mostly retail investors, although in that case groups of investors were using social media to push stocks higher.

(With AP inputs)