SVB’s collapse was triggered by ‘first Twitter-fuelled bank run’

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

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

In particular, on the day leading up to the bank’s collapse, several prominent venture capitalists took to Twitter and used their major 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 worrying situation at the bank on private Slack channels, according to The Wall Street Journal.

On the other side of a screen, startup leaders rushed to withdraw money online — so much so that some told CNN that the online system seemed to be working. Still, the end result was a modern race to withdraw money, which House Financial Services chairman Patrick McHenry later described in a statement as “the first Twitter-driven bank run.”

“Even in ancient times, long before we had any kind of modern communication, these were often rumors that went really fast. The reason it would happen is people would walk down the street and see people standing outside benches,” Andrew Metrick , 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 bank run experience was also a far cry from previous eras when a large number of customers would physically show up at a bank to withdraw money (although some also queued outside Silicon Valley Bank locations). Now many could do that. online or via mobile devices.

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

Silicon Valley Bank was arguably uniquely sensitive to these factors given its technology-oriented customer base. In addition, the clients, many of whom were venture capital backed companies, were much more likely than the average consumer to hold more than the standard maximum FDIC insured amount of $250,000 in their accounts.

“The FDIC covers 250,000, but am I going to get my whole 8 digits back?” a startup founder told CNN last week, after the bank collapsed. Other large tech companies kept even larger amounts in the bank. That likely made the bank’s customers even more susceptible to the panic spreading online.

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

“Classic runs on the bank hurt our entire system,” he wrote in a long Twitter thread on Thursday. “People are making public jokes about this. It’s not a joke, this is a serious matter. 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, only adding to the viral panic on Twitter.

“YOU ABSOLUTELY HAVE TO BE DANGERS NOW,” says Jason Calacanis, a tech investor, wrote on Twitter Sunday. “THAT’S THE RIGHT REACTION.”

Hours later, the Biden administration stepped in, guaranteeing that the bank’s customers would have access to all of their money from Monday.