SVB’s collapse was caused by ‘the first Twitter-fueled banking race’

New York (CNN) The massive amount of customer withdrawals that led to the collapse of Silicon Valley Bank had all the hallmarks of an old-school bank, but with a new twist befitting the primary industry the bank served: much s took place online.

Customers withdrew $42 billion in a single day last week from Silicon Valley Bank, leaving the bank with a negative cash balance of $1 billion, the company said in a regulatory filing. The staggering withdrawals happened at a speed that digital banking allowed and were likely fueled in part by the viral panic that spread across social media platforms and, it seems, in chat groups. private.

In the day leading up to the bank’s collapse, many high-profile venture capitalists took to Twitter in particular and used their major platforms to sound the alarm about the situation, sometimes typing in all caps. Some investors have urged startups to rethink where they keep their money. The founders and CEOs later shared tweets about the bank’s concerning situation on private Slack channels, according to the Wall Street Journal.

On the other side of a screen, startup executives rushed to withdraw funds online — so many, in fact, that some told CNN the online system seemed to be breaking down. Yet the end result was a modern race to withdraw funds, which House Financial Services Chairman Patrick McHenry later described in a statement as “the first bank race fueled by Twitter.”

“Even in ancient times, long before we had any modern form of communication, these kinds of things tended to be rumors that traveled very fast. The reason this happened was because people walked in the street and watched people standing outside banks,” 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 rush experience was also a far cry from previous eras when large numbers of customers physically showed up at a bank to withdraw funds (although some also lined up outside Silicon Valley Bank locations) . Now many could. online or via mobile devices.

House Financial Services chairman Patrick McHenry (seen here in January) described SVB’s collapse as being driven by “the first Twitter-fueled banking race”.

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

Silicon Valley Bank was arguably particularly sensitive to these factors given its tech-focused customer base. Moreover, his customers, many of whom were venture-backed companies, were much more likely than the average consumer to keep more than the FDIC-insured maximum of $250,000 in their accounts.

“The FDIC covers 250K, but will I get all of my 8 digits back?” a startup founder told CNN last week after the bank collapsed. Other big tech companies have kept even larger sums with the bank. This has 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, have urged members of the venture capital community to “speak out publicly to quell the panic” around Silicon Valley Bank last week and warned of creating “mass hysteria”.

“Classic ‘runs to the bank’ hurt our whole system,” he wrote in a long twitter thread THURSDAY. “People make public jokes about it. It’s not a joke, it’s something serious. Please treat it as such.”

His pleas for calm were not enough. The next day, the US Federal Deposit Insurance Corporation stepped in and took control of the bank, which only added to the viral panic on Twitter.

“YOU SHOULD BE ABSOLUTELY TERRIFIED RIGHT NOW,” Jason Calacanis, a tech investor, writing on Twitter on Sunday. “THIS IS THE RIGHT REACTION.”

Hours later, the Biden administration stepped in and guaranteed that bank customers would have access to all their money starting Monday.

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