Banks around the world have tumbled in recent days amid fears that the collapse of the Silicon Valley Bank (SVB) could trigger a broader crisis in the sector.
The speed at which market fears have spread around the world has forced bank managers and regulators to act with unprecedented speed: US authorities guaranteed all deposits in the SVB – and in signatures of smaller banks – for 48 hours after the collapse. Just hours after Credit Suisse shares collapsed on Wednesday, the Swiss central bank stepped in with a $54 billion loan.
While financial emergencies are nothing new, these crises – and the resulting responses – are unique in that they have been accelerated by a frenzy of social media chatter that has fueled the panic.
“It was a bank sprint, not a bank run”
A bank run occurs when customers lose confidence in an institution’s ability to look after their money and large numbers withdraw their deposits at once. The more people withdraw their money, the less chance there is for the bank to cover the withdrawals, leading to more customers piling up and demanding their money be returned.
“If you see a bomb disposal expert walking down the street, don’t ask him what happened, just try to keep up,” writes Daniel Davies, chief executive of Frontline Analysts, in the Financial Times.
Rumors about a bank’s solvency can accumulate for months or years before a run occurs. Or it can happen within a few hours.
The collapse of the SVB was the second largest bank failure in US history. The largest, Washington Mutual in 2008, took place over a period of eight months. The collapse of the SVB took place in just under two days.
Concerned Twitter posts and WhatsApp exchanges, coupled with the ease of access afforded by online banking, are seen by analysts as a serious catalyst for the current crisis. Experts believe that in the social media age, the psychological behavior behind a bank run — the mass fear of savers of losing their savings — may be amplified and go viral faster than bank officials and regulators can successfully respond.
Michael Imerman, a professor at the Paul Merage School of Business at the University of California-Irvine, says what happened to SVB was “a bank sprint, not a bank run, and social media played a central role in it.”
“You should absolutely be scared by now”
What few SVB customers realized a week ago was how vulnerable their bank was. Like all banks, it invested its customers’ deposits, with much of the money going into long-dated US government bonds. The problem was that bonds have an inverse relationship with interest rates. As the Federal Reserve began rapidly raising interest rates to fight inflation, the bonds SVB owned began depreciating significantly.
Many SVB clients also suffered from rate hikes and had to draw on their deposits to cover their day-to-day business expenses. However, with the value of its investments under pressure, the bank struggled to meet the demands of its customers.
A decision to raise funds by selling shares proved the death knell for the bank. Venture capital firm Founders Fund is said to have told companies in its portfolio to withdraw their money from the SVB. The news spread like wildfire in the gossip world of Silicon Valley. Customers withdrew $40 billion in a matter of hours – a fifth of SVB deposits.
Mark Tluszcz, CEO of Mangrove Capital, tweeted, “If you don’t advise your companies to get the cash out then don’t do your job as a board member or as a shareholder.”
Investor Bill Ackman tweeted that if federal regulators didn’t step in quickly and guarantee all deposits, the runs on other banks would begin Monday.
“You should be absolutely terrified by now,” tweeted investor Jason Calacanis, using all caps for emphasis. “That’s the right response to a bank run and contagion.”
Other high-profile entrepreneurs sounded the alarm, which spread on social media and resonated loudly with the bank’s clients, who were typically tech-savvy entrepreneurs who engaged in online chatter.
Congressman Patrick McHenry, chairman of the US House Financial Services Committee, called the turmoil “the first Twitter-fueled bank run.”
Some news that caused cold sweats among financial clients proved misleading, prompting calls to focus on facts rather than speculation.
“The past few days represent a unique incident fueled by social media misinformation and are not indicative of the health of our industry,” Lindsey Johnson, president of the Consumer Bankers Association, said in a statement.
The fear spreads
SVB may be the first bank run of the social media era, but it wasn’t the first bank to have its fundamental business rocked by feverish Twitter speculation.
Early Thursday, Switzerland’s Credit Suisse announced it would borrow $53.7 billion from the Swiss central bank to shore up its finances after its share price fell by as much as 30%. The sell-off came as the bank’s largest shareholder, the Saudi National Bank (SNB), ruled out providing new funding due to restrictions limiting its involvement.
However, the chair of the SNB said Credit Suisse is “a very strong bank” and unlikely to need any more cash following a major restructuring plan last autumn. A cap on the size of the stake was the reason for not investing further.
Credit Suisse’s troubles are not new, the bank’s clients have weathered a series of scandals and stock price swings over the past decade that have led to a churn of clients who have withdrawn their money from the bank and contributed to losses that have grown to 7.3 billion Swiss francs in 2022.
But last October, shares fell 12% in one day after a journalist tweeted that a “major international investment bank” was on the brink. The tweet was then mis-paraphrased by investing.com, which shared it with thousands of followers. The rumor spread like wildfire across online forums and social media accounts, but it was unfounded, at least at the time.
Credit Suisse’s issuance was well established at the time and the share price had been falling for months, but experts have warned that the tweet and its subsequent dissemination would be very damaging to the bank.
Regulators, policymakers and bankers are all now being forced to look at the role social media may have played in the current upheaval – and what they might be able to do to stay ahead of the rumours.
Associated Press and Agence France-Presse contributed to this report