When prominent businesses and investors started pulling their money out of Silicon Valley Bank over concerns about the bank’s solvency, word spread fast on Twitter.
“Run on the bank!” entrepreneur Kim Dotcom posted in a March 12 tweet that was viewed by 2.4 million people and retweeted nearly 3,500 times. “Get your money out. First thing on Monday. US banks are in trouble. FED emergency meeting. Deposits may get locked. Possible withdrawal limits. When markets collapse your bank deposits that US banks use to invest may be in danger. Cash is king. Get out now!”
Social media chatter, which amplified offline conversations within California’s clubby tech community, as well as the ease of online banking, helped fuel a devastating — and very modern — bank run. In the modern age, panic can be transmitted with just a few keystrokes.
“This is a case of a bank run that happened in less than 48 hours when people got a bunch of information through Slack, WhatsApp, text message and even emails saying, ‘Houston, we have a problem,'” Andres Vinelli, chief economist at CFA Institute, an association of investment professionals, told CBS MoneyWatch.
“You don’t even need to walk to your bank’s branch — you just press a few buttons on your smartphone and your money is moved from a bank you perceive as weak to a bank that’s more safe,” he added. “And that carries with it the potential to do things that are potentially harmful, because if everyone does it at the same time, bad things happen.”
“Twitter stoked the fire”
Social media magnified offline, private chatter and SVB catered to a tight-knit, high-tech clientele, which likely factored into the bank’s rapid unravelling, said Charlotte Principato, financial services analyst for Morning Consult, a decision intelligence company.
“Twitter was a huge part of what caused the hysteria. A lot of conversations were happening over the good old-fashioned telephone because this is a tight-knit community, and Twitter stoked the fire. That is really what caused this digital run on the bank.”
As a result, the one-two punch of social media and financial technology makes banks more vulnerable to a flash run than only a decade ago.
“The combination of these two factors could potentially have a big effect on the banking world,” Vinelli said.
SVB’s sudden failure suggests that stiffer 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 a part of our lives in a more immediate and useful way than it used to be, and it’s easy to get a run started. You just see things on a screen and you get concerned.”
Ludwig compared social media gossip to “wildfires we need to be able to put out quickly.”
“When they’re small, they don’t look like very much, and then they can blow up and turn into a huge conflagration very quickly and we have to be able to douse them with water,” he added, noting that without tighter rules other banks could fall prey to lightning-fast runs.
Virtual speed bumps?
As usual with even well-intended regulations, however, the devil is in the details. “Irresponsible talk can be contained, but in a free society and with our modern technology, it’s very hard,” Ludwig said.
Vinelli of the CFA institute said regulators should create “speed bumps” to deter digital bank runs, such as rules that slow the movement of money in and out of banks accounts.
But the trend in banking is toward enabling even faster ways to move money around, while the question of whether to put guardrails on what people can say about financial matters online remains complicated.
“We have a fairly sophisticated set of laws and regulations that concern financial advice, but the reality is that people out there who don’t consider themselves financial advisers are indeed providing de facto financial advice by saying ‘go buy this and sell that,'” Vinelli said.