NEW YORK — 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 had the panic but few other similarities, instead taking place on Twitter, message boards, mobile phones and bank websites.
What made it 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.
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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 noon ET, instead of waiting until the close of business, which is the regulator’s typical operating procedure.
Some other well-known bank failures, such as IndyMac or Washington Mutual in 2008 or Continental Illinois in the 1980s, 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.
Sam Altman, CEO of Open AI, tweeted: “the speed of the world has changed. things can unwind fast. people talk fast. people move money fast.”
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 advised his invested companies to close their Silicon Valley Bank accounts.
For David Murray, the warning of the first bank run of the social-media age came in a one-sentence email. He’s a co-founder of Confirm.com, an employee performance management company in San Francisco that had millions of dollars sitting in accounts at Silicon Valley Bank.
Murray received a terse email Thursday morning saying that a run was underway there and recommending everyone pull their money out immediately. The email came from an investor whom Murray hears from so infrequently that his co-founder wondered if it was a phishing attempt or other scam.
After verifying the email and seeing the steep drop in the stock price of the bank’s parent company, SVB Financial, Murray and his colleagues rushed to withdraw the company’s money. Instead of heading to a branch, they quickly pulled up a webpage and logged in. It took a few tries, but they eventually moved every cent to an account at a different bank within a half hour.
Murray could see fear rising among other startup companies in real time.
“We have a trusted network of founders” of startup companies who communicate with each other over Slack, Murray said. “Normally these chat groups are dead. But that day, all the Slack groups were lit up.”
Between 1930 and 1933, during the Great Depression, roughly 9,000 banks failed. 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.
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 2007-09 recession.
Banks are now grappling with the fact that they could be the next target of a social media-fueled bank run.
Several prominent investors issued bombastic predictions that if the federal government did not step in to make all Silicon Valley Bank depositors whole — both insured and uninsured — there would be more bank runs on Monday.
In the end, Washington capitulated. Under the plan announced Sunday, depositors at Silicon Valley Bank were able to access all their money. A new Federal Reserve program will allow banks to post certain high-quality securities as collateral and borrow from a government emergency fund. Both Treasury and Federal Reserve officials told reporters over the weekend that the programs were created in part due to concerns further bank runs — fueled by social media — could occur.
A look at the US economy's vital signs
Consumer inflation, not much of a problem, on average, since the early 1980s, started picking up in the spring of 2021 as the economy roared out of recession and Americans spent freely again. At first, Fed Chair Jerome Powell and some economists dismissed the resurgent price spikes as likely a temporary problem that would resolve itself once clogged supply chains had returned to normal.
But the supply bottlenecks lasted longer than expected, and so did high inflation. Worse, Russia's invasion of Ukraine a year ago sent energy and food prices rocketing. By June 2022, consumer prices were 9.1% higher than they'd been a year earlier — the hottest year-over-year inflation in more than four decades.
By then, the Fed had begun, belatedly, to respond. It has raised its benchmark rate eight times since March 2022 in its most aggressive credit tightening since the early 1980s.
In response, consumer inflation edged down from its mid-2022 peak. It posted milder year-over-year increases for seven straight months as supply chains unclogged and higher borrowing costs worked their way through the economy, putting a brake on overspending.
Financial markets appeared ready to declare the inflation dragon all but slain.
Then came January's unexpectedly hot consumer inflation data. Two days later, the government reported that wholesale prices had jumped 0.7% from December to January, nearly twice what forecasters had expected.
Next came bad news from the inflation gauge the Fed watches most closely: The government's personal consumption expenditures price index. It accelerated 0.6% from December to January, far above the 0.2% November-to-December uptick. On a year-over-year basis, prices rose 5.4%, up slightly from the annual increase in December and well above the Fed's 2% inflation target.
The PCE report "adds to the difficult if not impossible task facing the Fed in terms of getting inflation back to its 2% target without driving the economy into a ditch,'' said Joshua Shapiro, chief U.S. economist at the Maria Fiorini Ramirez Inc. consultancy.
One concern is that this time, inflation may prove harder to slow than it was initially. Households have increasingly shifted their spending away from physical goods like patio furniture and appliances to experiences like traveling, restaurant meals and entertainment events. Inflationary pressures, too, have shifted from goods toward services, where price acceleration can be harder to tame.
In part, that's because chronic labor shortages at stores, restaurants, hotels and other service-sector industries have led many employers in those industries to keep raising pay to attract or retain workers. Those employers, in turn, have generally raised their prices to make up for their higher labor costs, thereby fueling inflation.
Some economists expect the Fed to raise its benchmark rate by a substantial half-percentage point when it next meets March 21-22, after having announced only a quarter-point hike when it met Jan. 31-Feb. 1.
THE OVERALL ECONOMY
The flipside of the disquieting inflation news is good news on the state of the economy — or what would be considered good news in normal times. Even burdened by rising borrowing rates, the economy has proved stronger and sturdier than most forecasters had imagined.
"This economy today looks very different from where we thought it was in mid-January,'' said Peter Hooper, an economist at Deutsche Bank. "Before, we thought that things were slowing down, the labor market was softening, wage and price inflation was coming down."
With inflation pressures still persistent, Hooper said, "there's this growing expectation that the Fed has clearly more work to do.''
The economy regained its footing last summer after enduring an anemic first half of 2022. The nation's gross domestic product — its total output of goods and services — contracted from January through March last year and again from April through June.
Though one informal definition of a recession is two straight quarters of negative growth, most economists set aside such concerns this time. They noted that the economy had shrunk in early 2022 because of factors unrelated to its underlying health: Leaner business inventories and a surge in imports, which widened the U.S. trade deficit.
GDP quickly regained momentum: It grew at a solid 3.2% annual rate from July through September and a 2.7% rate from October through December. Steady consumer spending contributed heavily to the growth.
Economists still foresee a recession sometime this year — they were always skeptical of a soft landing — but now see it coming later than they'd expected. A survey of 48 forecasters issued Monday by the National Association for Business Economics found that only a quarter of the respondents think a recession will have started by the end of March, down from half who had predicted so in December.
The remarkable strength of the American job market has defied expectations throughout the economic tumult of the COVID years. 2021 and 2022 were the two best years for hiring in U.S. government records dating to 1940.
Job creation was expected to slow this year. Not so far. In January, employers added a blistering 517,000 jobs, far surpassing December's 260,000 gain. And the unemployment rate reached 3.4%, its lowest level since 1969.
What's more, American workers as a whole are enjoying nearly unheard-of job security despite some high-profile layoffs in technology and a few other sectors. The government's count of monthly dismissals and layoffs sank below 1.5 million for the first time in 2021 and has stayed there since. There are now about two job openings, on average, for each unemployed American.
But a robust job market also puts upward pressure on wages — and therefore on prices. Which means further inflation.
"The kind of wage gains we're seeing and the kind of tightness in the labor market is consistent with 3.5% to 4% inflation, not 2% or 3%,'' KPMG's Swonk said. "That's the hard reality of where we are.''
Their jobs secure, their bank accounts still bolstered by pandemic-era savings, Americans have continued to spend, shrugging off higher interest rates and prices.
In January, retail sales rose at their fastest pace in nearly two years, rebounding from a tepid holiday shopping season. Even after accounting for inflation, consumers spent their after-tax dollars at the fastest pace since March 2021. Consumer spending on services, ranging from health care to dinners out to airline tickets, last year accounted for 95% of the economy's growth.
Mark Zandi, chief economist at Moody's Analytics, estimates that consumers still have $1.5 trillion in "excess savings'' — above what they'd have socked away if the pandemic hadn't hit — from government aid and from cutting back while stuck at home at the peak of the pandemic.
Still, inflation continues to cause hardships for millions of households. Adjusted for inflation, average hourly earnings have fallen for 22 straight months, government data shows. Many low- and middle-income families are turning to credit cards to sustain their spending.
The Fed's rate hikes, which so far have had only a limited effect on the overall economy, have walloped one industry: Housing.
Residential real estate depends on the willingness of people to borrow for what's typically the costliest purchase of their lives. As the Fed continually jacked up interest rates last year, the average rate on a 30-year fixed mortgage topped 7% last fall — more than double where it began 2022 — before dropping back slightly.
The damage has been severe. Sales of existing homes have dropped for a record 12 straight months, according to the National Association of Realtors. And the government's GDP report showed that investment in housing plunged at an annual rate of nearly 26% from October through December after having tumbled 18% from April through June and 27% from July through September.