BusinessSVB failure spurred by social media and mobile banking,...

SVB failure spurred by social media and mobile banking, Citigroup CEO Jane Fraser says

It’s been two weeks since the Silicon Valley Bank run that spurred a banking crisis. It took about 36 hours from SVB posting its troubled financials to it being shuttered by regulators. While the implosion exposed shortcomings in existing financial regulations, it also highlighted the role of social media in snowballing rumors and spreading panic in venture capital, private equity, and banking circles. 

“It’s a complete game changer from what we’ve seen before,” Citigroup CEO Jane Fraser said in an interview Wednesday about what social media and mobile banking did to fuel the crisis, Bloomberg reported

“There were a couple of Tweets and then this thing went down much faster than has happened in history. And frankly I think the regulators did a good job in responding very quickly because normally you have longer to respond to this,” she said.

The fallout didn’t end with SVB. Three established banks have collapsed since, including Credit Suisse, while First Republic Bank is in turmoil. 

To be sure, banking crises have happened numerous times in the past. But the speed at which this one escalated was unlike any other. Depositors were able to access their funds online via their phones, which may have made it easier for a $42 billion bank run to happen within hours. Fraser believes the problem isn’t so much about the banking industry as it is about specific banks. 

“This isn’t like it was last time. This is not a credit crisis,” said Fraser, referring to the 2008 financial collapse. “This is a situation where a few banks have some problems and it’s better to make sure we nip that in the bud.”

Social media frenzy: unleashed

SVB’s failure was the second largest in banking history, but perhaps the first one since mobile banking and social media became mainstream.

SVB’s parent company’s disclosure earlier this month that it planned to raise $2.25 billion through stock sales to cover its losses made investors skeptical. The next day, PayPal co-founder Peter Thiel said he had moved his venture capital’s funds out of SVB and advised his portfolio companies to do so as well. Other investment firms including Coatue Management and Union Square Ventures followed in giving their portfolio companies similar directives. 

By then, the chatter had begun on Slack, Twitter, and WhatsApp, with people asking about SVB or alerting others about a potential red flag at Silicon Valley’s once-favorite bank. This was different from, say, the 2008 financial crisis when people responded to articles in newspapers and on T.V. and had to queue-up outside banks to withdraw their deposits. 

“The fact that people can communicate so much more quickly … (has) changed the dynamic of bank runs and perhaps changed the way we have to think about liquidity risk management,” Todd Baker, a senior fellow at Columbia University’s Richmond Center, told Reuters

Experts have also pointed out how the ease and speed of the internet was instrumental in accelerating the crisis this time around.

“The irony in this loss of trust is that the ultimate driver is 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,” Ben Thompson, a business and technology commentator, wrote in a blogpost last week. “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.”

Ultimately, no bank is safe from a run, Pershing Square CEO Bill Ackman argued. And it’s unclear if there’s a way to slow the spread of stories (especially the big, bad ones) on social media. But it highlights the new reality that regulators are under extra pressure to act fast—faster than they previously had to when a banking crisis of SVB’s scale unfolded.

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