It should come as no surprise that the tech start-up founders who made up the majority of customers of the Silicon Valley Bank are keen adopters of online messaging. And in the hours leading up to the demise of the bank earlier this month, panicked Twitter posts and WhatsApp exchanges abounded.
After the bank announced that it was taking steps to shore up its finances in the wake of the tech recession, its stock price plummeted by 60 per cent as investors rushed to sell shares. Many Silicon Valley investors took to Twitter with warnings of an imminent “Startup Extinction Event” that would “set innovation back by ten years”. “YOU SHOULD BE ABSOLUTELY TERRIFIED RIGHT NOW,” tweeted one.
What followed was a frenzied pinging of the bank’s customers’ phones and laptops in the US and UK, as chat groups ordinarily used to swap industry news and advice were lit up with one single, urgent message: get your money out of SVB. In just a few short hours, the tech bank’s depositors had withdrawn deposits to the value of $40bn and within two days the bank had collapsed.
While its speedy demise was ostensibly triggered by its decision to raise funds through a sale of shares, only in the era of social media – where lightning fast messages caused panic to sweep through depositors like wild fire – could a bank fall so quickly. The irony is that the overblown tweets about the inevitability of a bank run only served to make a bank run unavoidable.
Michael Imerman, a professor of finance at the University of California-Irvine, described what happened at SVB as “a bank sprint, not a bank run, and social media played a central role in that”. While Congressman Patrick McHenry, chairman of the US House Financial Services Committee, called it “the first Twitter fuelled bank run.”
“In economic terms, it’s a bit like sitting in a dark building and someone’s shouting fire – there’s a scramble to get to the exit and you end up with a self-fulfilling prophecy with investors rushing to take money out of the bank,” says AJ Bell investment director, Russ Mould. “The banks have to sell assets to cover deposits so they have less money to lend which in turn inspires less confidence.”
Of course, a bank run triggered by word of mouth rumours is not a new phenomenon – you can trace them back to the bank runs in 1930s America when crowds gathered outside banks to withdraw their deposits during the Great Depression. The difference today is the speed with which social media allows those rumours to spread. Combine this with the easy access offered by online banking, and you have a catalyst for today’s financial crisis.
“Financial contagion can spread much faster and that’s happened over the last fortnight,” says Susannah Streeter, head of money and markets at Hargreaves Lansdown.
“Rumours about the stability of some institutions, combined with the ease of withdrawals, has accelerated the loss of confidence and led to a run on deposits.
“However, that’s not to say contagion would not have still spread, given the difficulties SVB was facing with tech customers pulling out their money as they burned through cash, while investments management had made turned sour due to high interest rates. Investors are still likely to have sniffed out weaknesses elsewhere, although it would have taken longer. Although Credit Suisse had its own particular difficulties, stretching back a number of years, the loss of confidence in the bank escalated due to the rapid spread of information and speculation.”
So is there anything banks can do?
“When a bank CEO stands up and says ‘don’t panic’, that’s the first thing that people tend to do. And the memories of 2007-09 are still very raw,” says Mr Mould. He adds: “Banks can keep reassuring, but ultimately, they need to take less risk.”
Stephen Yiu, manager of the Blue Whale Growth Fund, says that while had SVB had more time, some of their investments could have worked out a few years down the line. “But it doesn’t work like that in reality. The banking industry is a a lot less transparent then other industries. You can never truly know what they’ve done with the money and whether their investments are sound. So when rumours start it’s very difficult to know what is true and people listen to them.”
Only time will tell whether the market jitters around SVB and Credit Suisse will spread further. In the meantime, banks will have to work out what, if anything, they can do to stop their customers from being spooked on social media.
