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Say “bank ran away” and many people associate black and white photographs from the 1930s — crowds of angry depositors demanding their money. But the sudden collapse of Silicon Valley Bank and Signature Bank shows that in the age of social media and instant communication, financial panics can become extreme, facilitated by the possibility of Instant transfer and withdrawal capabilities.
How fast does it happen? Consider that when Washington Mutual experienced a runaway when it collapsed in September 2008, depositors withdrew $16.7 billion in a 10-day period. In contrast, customers at Silicon Valley Bank tried to withdraw 42 billion dollars – more than double – in just one day, last Thursday.
“You have transactions that can be done much faster… and get paid out much faster,” said Reena Aggarwal, director of the Psaros Center for Financial Markets and Policy at Georgetown University.
“So things sped up,” she said. “I think that’s part of what happened here. But in the end it was the fundamental problems at the bank that caused this.”
“All of that obviously made this happen very quickly,” Aggarwal said.
Mohamed El-Erian, an author and chief economic advisor at financial services giant Allianz, tweeted that the “supersonic speed of information flows” in the era of “tech-enabled banking” contributed to the rapid development. Meanwhile, OpenAI CEO Sam Altman, referring to the bank’s collapse before the Great Recession, tweeted on Sunday that “The world has changed since 2008; the speed of a waterfall can be very fast.”
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Regulators stepped in on Friday to shut down Silicon Valley Bank after the bank was forced to suffer a $1.8 billion loss for dumping some of its long-term Treasury bonds. USA. The news spread quickly, worrying depositors — among them companies like Roku and a host of high-value startups – scrambled to cash out and bankrupt banks. of New York Signature Bank, heavily exposed to cryptocurrencies and the tech sector, followed through with short orders over the weekend. Silicon Valley and Signature are the second and third largest banking failures in US history, respectively.
On Sunday, the federal government kicked off an emergency program to limit any possible spread of the bank failure. In a joint statement, Treasury Secretary Janet Yellen, Federal Reserve Board Chairman Jerome Powell and Federal Deposit Insurance Corporation Chairman Martin Gruenberg commit that depositors at Silicon Valley Bank and Signature Bank will have access to all of their funds. A third financial institution, First Republic Bank, is reeling amid concerns about the bank’s reliance on unsecured deposits from wealthy customers and businesses.
Jonas Goltermann, a senior economist at Capital Economics in London, agrees that social media has helped spur bank withdrawals in recent days. Social media has become intertwined with our social and financial lives, he said.
“It wasn’t even 15 years ago,” said Goltermann, referring to the 2008 financial crisis.
But according to Georgetown’s Aggarwal, there can be an upside to the lightning-fast transfer of financial information.
“In terms of running, you have to go from one balance point to another,” she says. In other words, the system needs to find its balance.
For example, during the Great Recession, understanding the economic situation took a long time because the flow of information was slower.
Today, that process is accelerated. “I think it’s better to reach that new equilibrium sooner rather than let it go by for days, weeks and months,” Aggarwal said.