Descriptions
Anatomy of a bank run in an era of digital banking, social media, and influencers
Almost a year after Diamond and Dybvig, along with Ben Bernanke, received the 2022 Nobel Prize in Economics for their seminal and influential model of bank runs and related financial crises, the world witnessed the dramatic run-on deposits of Silicon Valley Bank (SVB). Bank runs are a common feature of the extreme crises that have played a prominent role in monetary history. During a bank run, depositors rush to withdraw their deposits because they expect the bank to fail. In fact, the sudden withdrawals can force the bank to liquidate many of its assets at a loss and to fail. In a panic with many bank failures, there is a disruption of the monetary system and a reduction in production.
The Diamond-Dybvig model shows how banks' mix of illiquid assets (such as business or mortgage loans) and liquid liabilities (deposits which may be withdrawn at any time) may give rise to self-fulfilling panics among depositors. The cause of SVB’s bank run was reported as a sudden $42 billion in withdrawals by customers in less than 48 hours, overwhelming the bank’s liquidity and capital. The collapse of SVB is the largest bank failure in US since 2008 Washington Mutual closure. Modern innovations such as digital banking and the presence of social medias such as Twitter, WhatsApp and Slack, and influencers played a critical role in amplifying the speed at which SVB collapse. Washington Mutual failed after customers withdrew $16.7 billion in 10 days, causing an unmanageable bank run. In Oct 2022, after a weekend Tweet claimed an unnamed European bank “on the brink” blew up a social media storm, customers of Credit Suisse pulled nearly $90 billion in assets in just a few weeks. On Friday March 10th, Signature Bank NY (SBNY) suffered a massive bank run, losing 20% of its deposits in a single day. Losing deposits at that rate is catastrophic for a bank. In an era of instant electronic payments/digital banking, people can remove their funds from banks even when the bank is closed for the weekend. On the weekend, SBNY’s bank run didn't stop and liquidity risk at the bank rose to a critical level.
The purpose of this SEACEN Online Seminar is to:
- Discuss the role of digital banking, social medias, and influencers in the demise of SVB, Signature Bank NY and Credit Suisse;
- Identify the characteristics of a bank run amplified by digital banking, social medias, and influencers;
- Discuss and explore bank run mitigation strategies in an era of digital banking, social medias, and influencers; and
- Discuss the policy responses to recent bank failures and resolution, and the consequences.
Presenter: Mark McKenzie, Senior Financial Sector Specialist, The SEACEN Centre.
