As prominent companies and investors began withdrawing their money from Silicon Valley Bank over concerns about the bank’s solvency, the news quickly spread to Twitter.
“Run onto the bench!” Entrepreneur Kim Dotcom posted a tweet on March 12 that was seen by 2.4 million people and retweeted almost 3,500 times. “Get your money out. First thing Monday. US banks are in trouble. FED emergency meeting. Deposits may be frozen. Possible withdrawal limits. If markets crash, your bank deposits, which US banks use for investments, may be at risk.” . Out now!”
Social media chatter, fueling offline conversations within California’s clubby tech community, plus the ease of online banking helped create a devastating — and very modern — bank run. In modern times, panic can be transmitted with just a few keystrokes.
“This is a case of a bank run that took place in less than 48 hours when people received a lot of information through Slack, WhatsApp, text messages and even emails saying ‘Houston we have a problem'” Andres Vinelli, chief economist at the CFA Institute, an association of investment professionals, told CBS MoneyWatch.
“You don’t even have to go to your bank’s branch – you just press a few buttons on your smartphone and your money is moved from a bank you find weak to a bank that’s more secure,” he added. “And that has the potential to do things that are potentially harmful, because when everyone does it at the same time, bad things happen.”
“Twitter stoked the fire”
Offline-boosted social media, private chatter and SVB served a tight-knit, high-tech clientele, which likely contributed to the bank’s rapid collapse, said Charlotte Principato, a financial services analyst at Morning Consult, a decision intelligence firm.
“Twitter was a big part of what caused the hysteria. A lot of conversations have been on the good old-fashioned phone because this is a tight-knit community, and Twitter has been stoking the fire. That’s really what’s driving this digital run on the bank.”
As a result, the dual victory of social media and financial technology makes banks more vulnerable to a flash run than they were a decade ago.
“The combination of these two factors could potentially have a major impact on the banking world,” Vinelli said.
The sudden failure of the SVB suggests stricter banking regulations may be needed for the digital age, Eugene Ludwig, a former Comptroller of the Currency and CEO of Ludwig Advisors, told CBS MoneyWatch. “Media is so much more immediate and useful a part of our lives than it used to be, and it’s easy to get a run on. They just see things on a screen and worry.”
Ludwig likened social media gossip to “running fires that we need to put out quickly.”
“When they’re small, they don’t look very special, and then they can explode and turn into a huge fire very quickly, and we have to be able to douse them with water,” he added, noting that without to tighten rules, other banks could fall victim to lightning-fast runs.
Virtual speed bumps?
However, as is usual with even well-intentioned regulations, the devil is in the details. “Irresponsible talk can be curbed, but in a free society and with our modern technology it is very difficult,” said Ludwig.
CFA Institute’s Vinelli said regulators should create “speed bumps” to prevent digital bankruns, such as B. Rules that slow the movement of money in and out of bank accounts.
But the trend in banking is to enable even faster ways to move money, while the question of whether to set guard rails for what people can say about financial matters online remains complicated.
“We have a pretty sophisticated set of laws and regulations that pertain to financial advice, but the reality is that people out there who don’t consider themselves financial advisers are actually offering de facto financial advice by saying, ‘Go sell this’ . ‘ Vinelli said.