In the original Mary Poppins film, nine-year-old Michael Banks accidentally starts a bank run by reclaiming his tuppence coin.
Momentum had barely developed when Northern Rock experienced runs outside of its stores in 2007, heralding the start of the 2007-08 global financial crisis.
A year later, when Bradford & Bingley ran into trouble, the Bank of England had observers outside the bank’s branches but was relieved there were no such queues for the nation’s television cameras.
But the momentum of bank runs appears to be developing — and such panics may become more difficult to ward off.
I’ve often thought about this question: How would the 2007/08 financial crisis have been in the current era of Twitter, Facebook, Instagram and TikTok?
This question is now being answered, perhaps unintentionally and not entirely positively, by the current fear of the banks.
According to US Federal Reserve Chairman Jerome Powell, the Silicon Valley Bank experienced the fastest bank run in US history. Vice Chairman Michael Barr told the US Senate yesterday that “social media saw a spike in talk of a run and uninsured depositors were quick to flee” and their money “at an extraordinary rate of $40 billion ($32 billion). .GBP) withdrawn in one day”.
The following day, the SVB expected “even larger outflows” and so “there was panic among the remaining depositors of the SVB”.
These are unbelievable sums. The contagion spread across continents. The Bank of England told MPs on Monday that SVB UK, its UK arm, lost £3bn or 30% of its deposit base on the same day.
Gov. Andrew Bailey said earlier this week: “One of the lessons we need to learn from Silicon Valley Bank, and it’s not the only example, in the age of social media, is the speed at which runs can take place. And in an age of digital banking, the speed at which social media can translate into losses. This is very different from the Northern Rock style queue at the branch.
He pointed to changing bank safety regulations to see if they “fit in with this type of dynamic that’s taking place”.
The dynamic is a combination of instant internet banking and social media, meaning a system built on credibility, belief and trust is now inherently more fragile. Think of the leading tech companies on WhatsApp groups or Slack and advise the companies they are invested in to withdraw all their money.
“Bank Run” doesn’t quite get it. The SVB was more of a 100-meter world record in the Olympic bench sprint.
And while the SVB had its own particular dynamic, as depositors were concentrated in one industry and most deposits were not covered by normal savings protection, these concerns apply to a broader spectrum.
A search for “bank run” on major social media over the past two weeks turned up a plethora of figures advising people to withdraw their money from similar institutions.
Some of this has been packaged into distrust of mainstream “experts” over trust in cryptocurrency. Part of the success of bitcoin and crypto in general has been evangelical skepticism about mainstream banking. This is now a vocal and noticeable online community that didn’t exist during the 2008 financial crisis.
All of this has not been helped by communication difficulties about what is and is not covered by US deposit insurance.
On balance, it is reasonable to conclude that a low-trust environment nurtured on social media has a significant impact on the fragility of a belief-based system.
This in turn could require a regulatory response.
Bank of England regulator Sam Woods of the Prudential Regulation Authority yesterday told MPs they may need to change their assumption about how quickly deposits can flee a bank.
Currently, the Liquidity Coverage Ratio assumes that a bank could lose as little as 0-20% of its retail deposits or 20-40% of its corporate deposits over a one-month period.
As a reminder, SVB UK lost 30% of their deposits in a single day.
Current regulation appears likely to be changed, but the downside of this will mean that banks may not be able to lend as much credit to the economy.
Perhaps this is an overreaction to the very particular case of SVB. It’s a careful balancing act. Other countries are also considering increasing the amount of deposits covered by guarantee schemes. However, it’s a fair criticism that it’s unrealistic to imagine corporations being able to bank and maintain payroll from dozens of bank accounts to protect all of their deposits.
The good news is that the UK regulatory system has fared well so far. SVB UK had to be converted into a subsidiary last year and that meant it was able to sell the assets intact to HSBC with no taxpayer funding.
But the way we calculate bank safety may change quickly with this month’s “Insta-Run.”
Add Comment