The thing about a run on the bank...
Mar. 17th, 2023 07:16 am![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png)
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.
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.
no subject
Date: 2023-03-17 07:25 pm (UTC)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.
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.
no subject
Date: 2023-03-17 08:14 pm (UTC)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.
no subject
Date: 2023-03-17 09:28 pm (UTC)Peter Thiel: ✔️ and ✔️.
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Date: 2023-03-31 05:07 am (UTC)Example news coverage: Fortune magazine article, 30 Mar 2023.
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Date: 2023-03-31 07:12 pm (UTC)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.
no subject
Date: 2023-03-31 07:52 pm (UTC)