The thing about a run on the bank...

[canyonwalker]

An interesting thing about the recent failure of Silicon Valley Bank is that it's not due to bad investments. It's actually mostly psychological.

SVB didn't invest in fundamentally unsound investments. These weren't complex and dishonestly mis-rated mortgage backed securities, like what screwed up banks in the Global Financial Crisis of 2008. These were treasury bonds, an investment that's considered safe and conservative. There's no "What's this really worth?" mystery as bonds are priced in transparent, highly liquid markets throughout the day. When the agency behind them makes a change it holds a press conference.

SVB also didn't lose a ton of money on these investments. The loss was, like, 2% of SVB's total assets.

People argue whether SVB's mistake was having that 2% loss. Yes, they could have done better. But really their big mistake was communicating the loss. They were too loud about it!

You see, a run on the bank happens when there's a loss of confidence. A few depositors withdraw their money and announce they did it because they think the bank's in danger. This spooks other depositors, who withdraw their money, too. Soon the bank has to sell of assets to pay out these withdrawals— because, remember, banks don't just have everyone's money sitting in cash in a vault. That triggers further fears, triggering further withdrawals. It becomes a vicious downward cycle.

A fear cycle is exactly what killed SVB. They helped trigger it by being too transparent about suffering that 2% loss. The CEO basically went on social media about it. That alerted a few big-money depositors, who (a) withdrew their money and (b) also posted on social media about it.

The fact the run on the bank spread through social media is a huge part of how it happened in the space of a day. Years ago, like back in the Great Depression, a run on the bank happened when people lined up at brick-and-mortar bank offices to demand cash from tellers. In 2023 a run on the bank happens when people use an app to transfer $25,000,000 and then tweet it.

Comments

[khedron]

That jives with what I've been reading. Elsenet I posted:

Ben Thompson (Stratechery) writes about this is in his newsletter, which is free once a week. Basically he says that mistakes were certainly made -- SVB had assets, but they weren't liquid and too many were in Treasuries which had lost relative value as interest rates have gone up so much in the past couple years. But if the t-bills had been held to maturity and sold, and people had kept their deposits in the bank as they had been, it would've all been fine. Except, sparks were lit last week turning it into a big Prisoner's Dilemma exercise, in which everyone loses unless they "irrationally" cooperate.

This is an environment that is fatal to [...] treating “community as more important than the ‘winning’ of any individual transaction.” When the stakes are so high [...], every decision becomes a Prisoner’s Dilemma — and, in retrospect, what happened to Silicon Valley Bank becomes inevitable. Moreover, it probably won’t be the only bad outcome of this new environment; it’s hard to understand the value of trust until it’s gone, and the full accounting of what has been lost will take years.

The irony in this loss of trust [.. was enabled by tech itself]. What made the Silicon Valley Bank run unique was (1) the ease with which its customers could execute withdrawals and (2) the speed with which news of Silicon Valley Bank’s impending demise spread. Just to put the scale of this collapse in context, a total of $7 billion in depositors’ assets was lost in The Great Depression; $7 billion then is $161 billion today. Silicon Valley Bank, meanwhile, processed $42 billion in withdrawals in 24 hours. It was the speed, fueled by zero distribution costs for both rumors and withdrawals, that was so destabilizing for an entity predicated on arbitraging time.

That destabilization and resultant loss of trust, meanwhile, is everywhere around us, from our politics to business to every aspect of media. [...]

https://stratechery.com/2023/the-death-of-silicon-valley-bank/

He doesn't blame Peter Thiel specifically for sparking the bank run, but I've seen that numerous places elsewhere.

[canyonwalker]

That's basically the same explanation as mine.

I've also seen a few places that blame Peter Thiel. That makes sense because: (1) Thiel is objectively more responsible than virtually anyone else for fomenting the fear cycle that led to the crash as he one of the first VCs to hit social media, and he hit it hard, urging tech execs and institutional investors to withdraw their money from SVB; and (2) He's an asshole.

[khedron]

Peter Thiel: ✔️ and ✔️.

[canyonwalker]

A couple weeks later now, but today Steve Schwarzman, CEO of Blackrock, a private equity firm with nearly $1 trillion in assets, also attributed the SVB failure to a classic run-on-the-bank panic made infinitely faster by social media:

“This crisis was caused by people on iPhones and other devices, hearing on social media that some bank might be in trouble. They responded with huge withdrawals in a very short period of time, collapsing the bank.”

Example news coverage: Fortune magazine article, 30 Mar 2023.

[khedron]

There's something funny about saying "darn it, if only it was harder for these kids to access their money". But it seems plausible that there's a space for "I'm not really concerned but it's easy to change so why don't I do that" which could exacerbate things in the specific case of bank runs.

[canyonwalker]

It's unfortunate that most news outlets are running this story with the lede iPHONES CAUSED BANK CRASH. Schwarzman's remarks are clearly about the speed with which alarming news passes from person to person and with which people can make banking transactions in 2023, not the specific brand of device that some people use. These aren't things to blame on a device maker, or even people in general. SVB really made the first mistake in the communications chain reaction by over-sharing its problems publicly.