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){kind=small}
canyonwalkerAn 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.
