In the first Mary Poppins movie, the protagonist, Michael Banks, is a nine-year-old boy who inadvertently starts a bank robbery by demanding the return of his tuppence coin.
The dynamics had hardly begun to develop when, in 2007, Northern Rock saw runs outside of its branches, which heralded the beginning of the global financial crisis that occurred in 2007-2008.
A year later, when Bradford & Bingley ran into trouble, the Bank of England placed spotters outside of the bank’s branches, but they were relieved to see that there were no lines of people waiting in front of the nation’s TV cameras.
But the dynamics of bank runs appear to be evolving, and it may become more difficult to prevent such panics from occurring.
I have given a lot of thought to the following question: what would the financial crisis of 2007-2008 have been like if it had occurred in this day and age of social media platforms such as Twitter, Facebook, Instagram, and TikTok?
The current jitters in the banking industry may be providing an answer to that question, albeit one that is not entirely conclusive or definitive.
Jerome Powell, the head of the United States Central Bank, stated that Silicon Valley Bank experienced the most rapid run on a bank in the annals of United States history. His vice chair Michael Barr testified before the United States Senate the day before that “social media saw a surge in talk about a run, and uninsured depositors acted quickly to flee,” withdrawing their money “at an extraordinary rate of $40 billion (£32 billion) in one day.”
The next day, SVB anticipated “even greater outflows,” which caused “panic among SVB’s remaining depositors,” as stated in the previous sentence.
These are absolutely mind-boggling numbers. The infectious disease spread to other continents. On Monday, the Bank of England informed MPs that SVB UK, its British arm, had suffered a loss of £3 billion, which is equivalent to a 30% reduction in its deposit base on the same day.
At the beginning of this week, Governor Andrew Bailey made the following statement: “One of the lessons that we have to take from Silicon Valley Bank, and it’s not the only example, is in an age of social media, the speed at which runs can take place. And in an age of digital banking, the speed at which social media can be translated into loss. This is very different from the Northern Rock-style queue at the branch.”
He suggested examining the possibility of revising the regulations governing bank safety to determine whether or not they “match to that sort of dynamic that’s taking place.”
A system that was constructed on credibility, faith, and trust is now inherently more fragile as a result of the combination of instant internet banking and social media as the driving force behind the dynamic. Think about the prominent figures in the tech industry who, in WhatsApp or Slack groups, are advising the companies in which they have investments to pull out all of their cash.
“Bank run” doesn’t quite capture it. SVB was more like an Olympic bank version of the 100-meter world record sprint.
And despite the fact that SVB had its own unique dynamic, with depositors concentrated in one industry and with the majority of deposits not being covered by the standard saver protections, these concerns are applicable to a wider range of institutions.
In the past two weeks, a search of the term “bank run” on the most popular social media platforms has revealed a wide variety of individuals advising people to withdraw their cash from financial institutions.
A portion of this can be summed up as a general lack of trust in mainstream “experts” as opposed to trust in cryptocurrencies. Evangelical skepticism of traditional banking systems can be credited with contributing to the success of cryptocurrencies in general, including Bitcoin. A vocal and noticeable online community has emerged in recent years, but one like this did not exist during the financial crisis of 2008.
Communication problems regarding what is and is not covered by US deposit guarantees have not helped the situation at all and have actually made it worse.
The bottom line is that it is reasonable to conclude that an environment of low trust that is bred on social media has a material impact on the fragility of a system that is built on faith. This is the conclusion that will be presented here.
This, in turn, may necessitate a response from regulatory authorities.
Yesterday, Sam Woods, the head of the Prudential Regulation Authority, who is also the regulator for the Bank of England, told members of parliament that the organization might have to change its assumption about how quickly deposits can be withdrawn from a bank.
At this time, the assumption that underpins what is known as the Liquidity Coverage Ratio is that a bank could potentially suffer a loss of 0-20% of its retail deposits or 20-40% of its corporate deposits over the course of a single month.
A quick reminder: on just one day, SVB UK lost thirty percent of its deposits.
The existing regulation is highly likely to be revised, but if this occurs, financial institutions may find themselves in a position where they are unable to inject as much capital into the economy.
It’s possible that this is an overreaction to the unique circumstance of SVB. It requires a delicate act of balancing. The total amount of deposits that are safeguarded by various protection schemes are being considered for expansion in a number of other jurisdictions. However, it is a reasonable criticism to assert that it is implausible to think that businesses will be able to bank from dozens of bank accounts that are designed to protect all of their deposit balances and also process payroll.
The encouraging news is that the regulatory system in the UK has been functioning effectively so far. Because SVB UK was required to transform into a subsidiary in the previous year, it was able to sell its assets in their entirety to HSBC without receiving funding from the government.
However, as a result of this month’s “Insta-run,” our methods for determining the safety of banks may need to be revised rather quickly.
