The run on deposits that led to the Rhode Island Credit Union crisis bubbled quietly below the surface for six weeks before exploding on New Years Day, 1991. The run that left the wreckage of Silicon Valley Bank in its wake on Friday was over in hours.
The change in how long it takes for a bank or credit union to come to ruin is almost completely driven by new technology that regulators and the institutions themselves must grapple with, and soon. Until then, the combination of social media and remote banking that felled SVB could be used to undermine even the largest banks by anyone, including foreign adversaries, short sellers, competitors or even a disgruntled former employee.
Bank customers — i.e., most of us — are almost always surprised to learn that less than 10 percent of bank deposits are actually available for withdrawals at any given time. This puts a premium on confidence in the system. Without it, the country’s banking system would collapse.
The last major update to the framework designed to protect the American banking system occurred over a dozen years ago, in the aftermath of the Great Recession. At that time, the technology that created the kind of risk banks face today largely didn’t exist — Twitter and Reddit were just in their infancy, Instagram was created in 2010, Snapchat the following year. Meanwhile, the digital tools that provide practically instant banking in 2023 weren’t yet in wide use — few people even had smart phones. In reality, it would have been nearly impossible for what happened to Silicon Valley on Friday to happen even 10 years ago.
At that time, most people managed their money through local bank branches, and some even spoke with their bankers in person. Even if a large number of depositors wanted to leave a bank, it would have taken a lot longer for word to spread and even longer for depositors who wanted to leave to process transactions. These extra hours — or days — would provide institutions with a buffer to grapple with the problem by communicating with their customers, asking the regulators for more liquidity (cash), or recapitalizing.
SVB was reasonably sound, and certainly on more solid ground than the troubled Rhode Island credit unions of 1990. SVB’s “problem” can be boiled down to two factors. First, they were careless about trading out low-earning assets for higher-earning ones. Secondly, and perhaps more important, their communication about the transactions was easily misconstrued by people who lacked the ability to cut through the banking jargon SVB served up to their customers. It wasn’t long before today’s instant communication platforms were filling the vacuum left by SVB’s inadequate communications – and in 2023, that only took minutes.
In an instant, the message that “SVB is in trouble! — get out fast!” went viral and the social media stampede was on. People glanced at Twitter, pulled out their cellphones and transferred millions. It was over for SVB.
While regulators determine how best to respond to the new lightning-fast realities of banking — perhaps find a way to provide more liquidity more quickly, and to slow things down without becoming an obstacle to commerce — banks and credit unions themselves can take steps to mitigate, if not prevent, future runs.
First, prudent, well-considered transparency about banking in general, and their bank in particular, would not only educate customers, but also help build trust in the bank itself. In addition to messaging about “Banking 101″, institutions could also review public earnings reports and provide updates about public disclosures in simple English, making customers aware of the inner workings of the bank.
Second, and probably more important, would be a commitment to elevate the importance of social media. The reality is that social media is largely an afterthought for many institutions, a backwater of “check the box” messaging about community engagement and interest rates. In short, a missed opportunity.
This is unfortunate, and dangerous, since when the battle came to SVB, it was almost exclusively fought on social media. The bank never knew what hit them.
Had SVB laid the groundwork with transparent, easily understood communications, and been prepared to take advantage of social media’s ability to respond immediately, they might have stood a chance to stem the gusher of deposits leaving the bank — and survive.
Last Friday’s events are only a preview of a new, dangerous moment for a banking system built on trust. To avoid becoming the next “defunct” bank, institutions should move quickly to inform their customers, and be prepared to use social media effectively when a crisis hits.
David Preston, Esq., was the public point person for Governor Bruce Sundlun’s response to the collapse of the Rhode Island Share and Deposit Indemnity Corporation, and the resulting closure of Rhode Island credit unions and banks in 1991. Today, he is the founder and president of New Harbor Group, a public policy and communications consulting group.