SVB collapse was driven by “the first Twitter-driven bank run”

New York (CNN) The massive amount of customer withdrawals that led to the collapse of Silicon Valley Bank had all the hallmarks of old-fashioned banking, but with a new twist that suited the primary industry the bank served: much of it unfolded online.

Customers withdrew $42 billion in a single day last week from Silicon Valley Bank, leaving the bank with a $1 billion negative cash balance, the company said in a regulatory filing. The staggering withdrawals unfolded at a speed made possible by digital banking and were likely fueled in part by viral panic spreading on social media platforms and, reportedly, in private chat groups.

In the day before the bank’s collapse, several prominent venture capitalists took to Twitter in particular, using their large platforms to sound the alarm about the situation, sometimes in all caps. Some investors urged startups to reconsider where they kept their money. Founders and CEOs then shared tweets about the troubling situation at the bank in private Slack channels, according to The Wall Street Journal.

On the other side of the screen, startup executives raced to cash out online — so many, in fact, that some told CNN the online system appeared to be crashing. Still, the end result was a modern-day race to withdraw funds, which House Financial Services Chairman Patrick McHenry later described in a statement as “the first Twitter-fueled bank run.”

“Even in the old days, way before we had any kind of modern communication, these tended to be rumors that traveled very quickly. The reason it would happen is that people would walk down the street and observe people standing outside the banks. ” Andrew Metrick, the Janet L. Yellen Professor of Finance and Management at the Yale School of Management, told CNN. “Now we don’t have that, but we have Twitter.”

The experience of the bank drive was also a far cry from earlier eras when large numbers of customers physically showed up at a bank to withdraw money (although some also lined up outside Silicon Valley Bank locations.) Now many could do so. online or via mobile devices.

House Financial Services Chairman Patrick McHenry (seen here in January) described SVB’s collapse as fueled by “the first Twitter-fueled bank run.”

“What made Silicon Valley Bank’s run unique was (1) the ease with which customers could make withdrawals and (2) the speed with which news of Silicon Valley Bank’s impending demise spread,” Ben Thompson, an analyst who tracks the technology industry. , wrote in a post on Monday. “It was the speed, driven by zero distribution costs for both rumors and withdrawals, that was so destabilizing.”

Silicon Valley Bank was arguably uniquely susceptible to these factors given its technology-focused customer base. Also, the customers, many of whom were venture-backed businesses, were far more likely than the average consumer to have more than the standard maximum FDIC-insured amount of $250,000 in their accounts.

“FDIC covers 250K, but am I going to recover the full 8 figures?” a startup founder told CNN last week, after the bank had collapsed. Other large technology companies kept even larger sums at the bank. That probably made the bank’s customers even more vulnerable to the panic that spread online.

Some prominent tech figures, including Mark Suster, a partner at venture capital firm Upfront Ventures, urged those in the VC community to “speak publicly to quell the panic” surrounding Silicon Valley Bank last week and warned against creating “mass hysteria.”

“Classic ‘runs on the bank’ damaged our entire system,” he wrote in one long Twitter thread on Thursday. “People make public jokes about this. It’s not a joke, this is serious stuff. Please treat it as such.”

His calls for calm were not enough. The next day, the US Federal Deposit Insurance Corporation stepped in and took control of the bank, which only added to the viral panic on Twitter.

“YOU SHOULD BE ABSOLUTELY HAPPY RIGHT NOW,” Jason Calacanis, a tech investor, wrote on Twitter Sunday. “THAT’S THE RIGHT REACTION.”

Hours later, the Biden administration stepped in and guaranteed that the bank’s customers would have access to all their money starting Monday.

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