The collapse of Silicon Valley Bank, the second largest bank failure in US history, happened in less than 48 hours.
Customers withdrew $42 billion — nearly a quarter of the bank’s total deposits — in a single day last week.
The rapid bank run has raised questions about the vulnerability of financial institutions in a digital environment characterized by easy cash withdrawals and the proliferation of information on social media and other online spaces, where panic among a few can turn into a stampede for the exit.
Such an opportunity, known as a digital bank run, increases the risk of a sudden, widespread withdrawal of funds, especially among a group of depositors who share industry and social ties, such as the depositors at Silicon Valley Bank, experts told ABC News.
“This was the first Twitter-driven bank run,” said Rep. Patrick McHenry, RN.C., the chairman of the House Financial Services Committee, in a statement days after the fall of Silicon Valley Bank.
The group of depositors at Silicon Valley Bank consisted of a relatively small group of venture capital firms, tech startups and other large investors.
After a dire financial report sparked concern last Wednesday, some savers discussed their reactions in WhatsApp and Slack groups dedicated to startups, the Wall Street Journal reported.
Meanwhile, several prominent venture capitalists and other major investors took to Twitter to voice their concerns, fueling fears of a collapse.
Michael Burry, an investor best known for predicting the subprime mortgage crisis, warned in a now deleted tweet: “It’s possible we found our Enron today.”
Shares of Silicon Valley Bank fell 60% on Thursday in response to concerns about the bank’s ailing financial position.
According to entrepreneur Alexander Torrenegra, the bank’s sudden downturn in the early afternoon took over online discussions among startup founders.
“All my chats with tech founders in the US are on fire with what’s happening,” Torrenegra told on Twitter. “Obviously we have a bank drain. Surreal.’
Founders Fund, a venture capital fund led by billionaire investor Peter Thiel, withdrew all of its deposits that day, Bloomberg reported.
Since the bank is FDIC-insured, depositors received guaranteed protection of up to $250,000 in funds for various types of accounts in the event of a collapse. However, many depositors at Silicon Valley Bank had bills well in excess of $250,000, raising the stakes for those who failed to withdraw their money before potential bank failure.
“Because information comes out faster, you get the information in real time, it’s widespread and it drives people to action,” Campbell Harvey, a finance professor at Duke University, told ABC News. “If you’re the first group, you’ll get 100% of your money, and if you’re the last group, you might get zero.”
Hilary Allen, an American University Washington College of Law professor who studies banking regulation, said the relatively small and tight-knit community of bank depositors has accelerated the downfall.
“Virtually all savers came from the same community and a community that was very online,” Allen told ABC News. “If you have something like Silicon Valley Bank, where the vast majority of depositors are in the tech industry and are very connected and all talking to each other, those are the conditions where panic can set in very, very quickly.”
Investors fleeing the bank naturally had well-founded concerns about the bank’s financial health.
Silicon Valley Bank had invested heavily in long-dated government bonds and mortgage bonds, which typically yield small but reliable returns at low interest rates. However, when the Federal Reserve raised interest rates aggressively over the past year, those positions lost significant value.
A day before the big draw, Silicon Valley Bank announced it had lost $1.8 billion on the sale of those distressed bonds.
“This is not purely a bank run,” Itamar Drechsler, a professor of finance at the University of Pennsylvania’s Wharton School of Business, told ABC News. “The bank had a very fundamental problem.”
Still, the speed and reach of online communications likely accelerated the bank’s collapse, Dreschler said.
“As a crowd that gathers really quickly, there’s a problem when they decide to leave somewhere,” Dreschler said. “If we coordinate more through social media and other information technology, that could make the crowd move a lot faster.”
While digital banking allows for quick and easy withdrawals, the availability of such a service likely contributed little, if at all, to the bank’s run, given that such technology has been around for many years without significant problems, the experts said.
“People have been talking for a while about whether the speed of digital banking itself would contribute to bank runs,” says Allen of American University. “My take on that is that it’s been relatively easy to get your money out for a long time. I’m not sure how much of a difference that has made.”
In response to the outcry and fear of the crisis spreading more widely, the FDIC, the Treasury Department and the Fed finally took a big step on Sunday, telling depositors at Silicon Valley Bank that the FDIC would protect all of their funds, including those that exceed the limit. Limit of $250,000.
Later that day, the Fed announced an emergency lending program to cover the affected deposits and restore broader confidence in the financial system.
The spread of panic online may have contributed to the federal government’s decision to take such extraordinary measures and prevent uncertainty from seeping further into the financial system, Allen said.
“Was that part of the concern that motivated the Biden administration to intervene, fearing that the very public venting on Twitter could spill over to other banks as well?” she asked.
In a morning speech from the White House on Monday, President Joe Biden tried to reassure Americans that the banking system was healthy.
“Americans can rest assured that our banking system is safe,” Biden said. ‘Your deposits are safe. Let me also assure you that we are not dwelling on this. We’ll do whatever it takes.’
Biden also addressed the issue in a that day Twitter message.
ABC News’ Libby Cathey contributed to the reporting.