WASHINGTON — In the largest bank failure in US history, panicked customers of struggling Washington Mutual Bank withdrew $16.7 billion over a 10-day period in September 2008. But the recent run on Silicon Valley Bank made that seem as antiquated as paper paychecks.
In just a single day, a staggering $42 billion streamed out of SVB on March 9. With another $100 billion in withdrawals queued up for the next morning, regulators seized the bank in the second-largest — and fastest ever — US failure.
Bank runs used to take several days or even weeks before they toppled an institution. But accelerated by social media and online banking, SVB imploded in roughly 24 hours in what House Financial Services Committee Chair Patrick McHenry labeled “the first Twitter fueled bank run.” Now regulators, lawmakers, bankers, and industry experts are trying to determine if changes are needed to prevent another run from going viral.
Potential reforms include requiring regulators to monitor social media for signs of panic, revising models for how quickly deposits could be drained from an institution, and developing some sort of circuit-breaker — a modern version of the Great Depression’s bank holiday — to pause a run.
“This failure should rewrite the rule book because the regulators just learned that failures are measured in hours now, not days and weeks,” said Jaret Seiberg, a Washington financial policy analyst at TD Cowen investment bank.
SVB’s customers withdrew their money so rapidly that it stunned even veterans of the banking world.
“To the best of my knowledge, we’ve never seen deposits flee at the pace that they did from Silicon Valley Bank,” Treasury Secretary Janet Yellen told a Senate hearing in the days after the collapse.
Jane Fraser, chief executive of banking giant Citigroup, said the speed of SVB’s failure was “a complete game-changer.” And billionaire hedge fund manager Bill Ackman tweeted that “in a world of @Twitter-speed spread of information and smart-phone-enabled bank accounts where withdrawals can be made with the push of a button, no bank is safe from a run” unless the government insures all bank deposits — something federal regulators did for SVB.
Rob Nichols, chief executive of the American Bankers Association trade group, told an industry gathering on March 21 that he hoped the regulatory review of the failure examines “the speed at which longtime customers pulled their deposits out, and the significant role social media might have played in encouraging that behavior.”
When Washington Mutual, known as WaMu, failed at the start of the 2008 financial crisis, social media platforms were in their early days as was mobile banking on smartphone apps. Today, apps are “the most prevalent primary method of account access,” with 43.5 percent of households using them in 2021 compared to just 15.1 percent in 2017, according to the Federal Deposit Insurance Corporation. And electronic transfers of money between banks are now processed much more frequently and for larger transaction amounts than they were 15 years ago.
WaMu’s much slower descent allowed regulators to engineer its sale to JPMorgan Chase, protecting customers with deposits not covered by FDIC insurance. But SVB’s rapid failure gave regulators just a weekend to sell it and prevent potential losses on deposits over the FDIC’s limit of $250,000 per account when banks opened on Monday morning.
Unable to quickly find a buyer, federal officials stepped in and guaranteed all uninsured deposits at SVB and at Signature Bank, which also failed that weekend. The move was designed to prevent the contagion from spreading. Both banks were subsequently sold.
But whether SVB was a canary in the coal mine or just an extremely rare bird has yet to be determined. Federal officials said the bank was poorly run. It was particularly susceptible to a run because an unusually large portion of its total deposits — 88 percent — exceeded the $250,000 federal insurance limit. And its highly connected clientele of high tech executives and venture capitalists helped quickly spread the fear.
SVB began cratering following a March 8 announcement that it lost about $1.8 billion on a sale of bonds because of rising interest rates. Venture capital firms, including one run by Peter Thiel, reportedly began withdrawing their money from the bank and strongly suggested their clients do the same.
“This was a bank run by big business and venture capital on e-mail threads and Linked-In,” said Aaron Klein, an expert on financial technology at the Brookings Institution, a center-left think tank. The bank’s 10 largest customers held a combined $13.3 billion in deposits, an unusually large amount.
Klein, a former Obama administration Treasury official who helped craft the banking reforms after the 2008 financial crisis, said regulators were using social media as a scapegoat for their own failures in preventing SVB’s collapse.
“We couldn’t see this coming because Twitter, like Twitter’s something new? Come on,” he said. “It’s far easier to point the finger at Twitter than to look at themselves in the mirror and realize the mistakes that they continue to make.”
But some lawmakers and experts said the concerns are valid.
“Some of the venture capitalists — and I’m a former venture capitalist — basically shouting fire in a crowded theater ... it raises real questions,” Senator Mark Warner, a Virginia Democrat, said of venture capital firms urging their clients to pull out their money.
Representative Ritchie Torres, a New York Democrat, has introduced legislation that would require the Financial Stability Oversight Council, a panel of regulators established in the aftermath of the 2008 financial crisis, to monitor social media as part of its oversight of the nation’s financial system and study if content on those platforms affects “financial panic and bank runs.”
Hilary J. Allen, a law professor at American University and expert on new financial technologies, noted the unique qualities of Silicon Valley Bank. But she said the bank run, like the rapid Reddit-fueled rise of GameStop stock in 2021, shows “authorities should be prepared for panics accelerating very quickly through social media channels in the future.”
She suggested a regulatory circuit breaker similar to what Wall Street uses to prevent so-called flash crashes by temporarily halting trades of a stock that’s seeing unusual activity. The most famous instance of a similar strategy was when President Franklin Delano Roosevelt closed banks for a week in 1933 to ease a nationwide run during the depths of the Great Depression.
“Technology speeds things up a whole lot and sometimes what we really need is a pause,” Allen said. A digital bank holiday, during which no money could be withdrawn online, would allow federal officials to deliver a message about the safety of the system the way FDR successfully did, she said.
Another option to halt a run would be to slow electronic transfers between banks through the automated clearinghouse system that processes them, said Kris James Mitchener, an economics professor at Santa Clara University who has studied financial crises. Regulators or bankers would try to digitally replicate a Depression practice of bank tellers being instructed to pay customers in pennies to slow the pace of withdrawals, he said.
“Just because the speed of the network allows you to move money fast doesn’t mean your computers have to move that money fast,” he said. “If you’re facing a run, it’s a fight for your bank’s life.”
Jim Puzzanghera can be reached at jim.puzzanghera@globe.com. Follow him @JimPuzzanghera.