Bank runs used to be slow. The digital era sped them up

FILE - Crowds gather outside the Brownsville Branch of the Bank of the United States in New York City after it had been ordered to shut down and taken over by the New York State Banking Department on Dec. 11, 1930. The recent failure of the Silicon Valley Bank was unlike a traditional bank run. It involved Twitter, internet memes and message boards and happened at unprecedented speed. (AP Photo/File)
FILE - Crowds gather outside the Brownsville Branch of the Bank of the United States in New York City after it had been ordered to shut down and taken over by the New York State Banking Department on Dec. 11, 1930. The recent failure of the Silicon Valley Bank was unlike a traditional bank run. It involved Twitter, internet memes and message boards and happened at unprecedented speed. (AP Photo/File)

By KEN SWEET and STAN CHOE

The Associated Press

NEW YORK (AP) -- A bank run conjures images of "It's a Wonderful Life," with anxious customers crammed shoulder to shoulder, desperately pleading with a harried George Bailey to hand over their money.

The failure of Silicon Valley Bank last week had the panic but few other similarities, instead taking place on Twitter, message boards, mobile phones and bank websites.

What made the failure of Silicon Valley Bank unique compared to past failures of large banks was how quickly it collapsed. Last Wednesday afternoon, the $200 billion bank announced a plan to raise fresh capital; by Friday morning it was insolvent and under government control.

Regulators, policymakers and bankers are looking at the role that digital messaging and social media may have played in the collapse, and whether banks are entering an age when the psychological behavior behind a bank run -- mass fear from depositors of losing their savings -- may be amplified and go viral quicker than bank officers and regulators can successfully respond.

"It was a bank sprint, not a bank run, and social media played a central role in that," said Michael Imerman, a professor at the Paul Merage School of Business at the University of California-Irvine.

The Federal Deposit Insurance Corporation estimates that customers withdrew $40 billion -- one fifth of Silicon Valley Bank's deposits -- in just a few hours, prompting the agency to shut down the bank before 12 p.m. ET, instead of waiting until the close of business, which is typical operating procedure for regulators when a bank runs short of money.

Some other well-known bank failures, such as IndyMac or Washington Mutual in 2008 or Continental Illinois in the 1980s, only happened after days or weeks of reports indicated those banks faced deep financial difficulties. Then a run occurred and regulators stepped in.

The Silicon Valley Bank run was, in many ways, the first of the digital era. Few depositors lined up at a branch. Instead, they used bank apps and phone calls to access their money in minutes. Venture capitalists and business owners described the early stages of the Silicon Valley run being led by private message boards or Slack channels, where entrepreneurs were encouraged to withdraw their funds.

Silicon Valley Bank also was unique in being almost entirely exposed to one community -- the tech industry, venture capital and startups. When this close-knit community of depositors talked to one another -- using digital channels to do so quickly -- the bank likely became more vulnerable to rumors and a run. This was a risk outside of the growth of social media, industry experts said.

While the withdrawals initially may have been orderly, they became a full-on bank run Thursday evening after the news spilled over to Twitter that billionaire venture capitalist Peter Thiel had advised his invested companies to close their accounts with Silicon Valley Bank.

As depicted with the fictional Building and Loan in " It's a Wonderful Life," runs on a bank often start off as a rumor and can quickly devolve to a tribal-like collective fear that sends depositors clamoring for their money, even when nothing is wrong. Because a bank run can happen at random and is hard to stop once started, the U.S. government created the FDIC to stop future bank runs under the premise that depositors' funds would be insured.

Between 1930 and 1933, during the Great Depression, roughly 9,000 banks failed. Since the FDIC's creation in 1933, bank runs have become much rarer. According to the FDIC, there were 562 bank failures between 2001 and 2023, with the vast majority of those happening during the 2007-2009 recession.

The entire banking industry is now grappling with the fact that they could be the next target of a social media-fueled bank run. The hive-like behavior is similar to what happened during the 2021 "meme stock" boom where companies were targeted by groups of mostly retail investors, although in that case groups of investors were using social media to push stocks higher.

"The last several days represent a unique incident fueled by misinformation on social media and are not indicative of the health of our industry," said Lindsey Johnson, president of the Consumer Bankers Association, in a statement.

For policymakers, there doesn't appear to be any immediate solution. One possibility that's been around for decades -- also depicted in "It's a Wonderful Life" -- is the idea of a bank holiday where regulators close a bank for a few days to allow for cooler heads to prevail.