• Home
  • Opinion
  • Quizzes
  • Redistricting
  • Sections
  • About Us
  • Voting
  • Events
  • Civic Ed
  • Campaign Finance
  • Directory
  • Election Dissection
  • Fact Check
  • Glossary
  • Independent Voter News
  • News
  • Analysis
  • Subscriptions
  • Log in
Leveraging Our Differences
  • news & opinion
    • Big Picture
      • Civic Ed
      • Ethics
      • Leadership
      • Leveraging big ideas
      • Media
    • Business & Democracy
      • Corporate Responsibility
      • Impact Investment
      • Innovation & Incubation
      • Small Businesses
      • Stakeholder Capitalism
    • Elections
      • Campaign Finance
      • Independent Voter News
      • Redistricting
      • Voting
    • Government
      • Balance of Power
      • Budgeting
      • Congress
      • Judicial
      • Local
      • State
      • White House
    • Justice
      • Accountability
      • Anti-corruption
      • Budget equity
    • Columns
      • Beyond Right and Left
      • Civic Soul
      • Congress at a Crossroads
      • Cross-Partisan Visions
      • Democracy Pie
      • Our Freedom
  • Pop Culture
      • American Heroes
      • Ask Joe
      • Celebrity News
      • Comedy
      • Dance, Theatre & Film
      • Diversity, Inclusion & Belonging
      • Faithful & Mindful Living
      • Music, Poetry & Arts
      • Sports
      • Technology
      • Your Take
      • American Heroes
      • Ask Joe
      • Celebrity News
      • Comedy
      • Dance, Theatre & Film
      • Diversity, Inclusion & Belonging
      • Faithful & Mindful Living
      • Music, Poetry & Arts
      • Sports
      • Technology
      • Your Take
  • events
  • About
      • Mission
      • Advisory Board
      • Staff
      • Contact Us
Sign Up
  1. Home>
  2. Big Picture>
  3. banking crisis>

SVB’s newfangled failure fits a century-old pattern of bank runs, with a social media twist

Rodney Ramcharan
March 30, 2023
SVB’s newfangled failure fits a century-old pattern of bank runs, with a social media twist

A crowd of depositors outside the American Union Bank in New York, having failed to withdraw their savings before the bank collapsed, 30th June 1931.

Photo by FPG/Hulton Archive/Getty Images

Rodney Ramcharan is a Professor of Finance and Business Economics at the University of Southern California.

The failure of Silicon Valley Bank on March 10, 2023, came as a shock to most Americans. Even people like myself, a scholar of the U.S. banking system who has worked at the Federal Reserve, didn’t expect SVB’s collapse.


Usually banks, like all companies, fail after a prolonged period of lackluster performance. But SVB, the nation’s 16th-largest bank, had been stable and highly profitable just a few months before, having earned about US$1.5 billion in profits in the last quarter of 2022.

However, financial history is filled with examples of seemingly stable and profitable banks that unexpectedly failed.

The demise of Lehman Brothers and Bear Stearns, two prominent investment banks, and Countrywide Financial Corp., a subprime mortgage lender, during the 2008-2009 financial crisis; the Savings and Loan banking crisis in the 1980s; and the complete collapse of the U.S. banking system during the Great Depression didn’t unfold in exactly the same way. But they had something in common: An unexpected change in economic conditions created an initial bank failure or two, followed by general panic and then large-scale economic distress.

The main difference this time, in my view, is that modern innovations may have hastened SVB’s demise.

Sign up for The Fulcrum newsletter

Great Depression

The Great Depression, which lasted from 1929 to 1941, epitomized the public harm that bank runs and financial panic can cause.

Following a rapid expansion of the “Roaring Twenties,” the U.S. economy began to slow in early 1929. The stock market crashed on Oct. 24, 1929 – a date known as “Black Tuesday.”

The massive losses investors suffered weakened the economy and led to distress at some banks. Fearing that they would lose all their money, customers began to withdraw their funds from the weaker banks. Those banks, in turn, began to rapidly sell their loans and other assets to pay their depositors. These rapid sales pushed prices down further.

As this financial crisis spread, depositors with accounts at nearby banks also began queuing up to withdraw all their money, in a quintessential bank run, culminating in the failure of thousands of banks by early 1933. Soon after President Franklin D. Roosevelt’s first inauguration, the federal government resorted to shutting all banks in the country for a whole week.

These failures meant that banks could no longer lend money, which led to more and more problems. The unemployment rate spiked to around 25%, and the economy shrank until the outbreak of World War II.

Determined to avoid a repeat of this debacle, the government tightened banking regulations with the Glass-Steagall Act of 1933. It prohibited commercial banks, which serve consumers and small and medium-size businesses, from engaging in investment banking and created the Federal Deposit Insurance Corporation, which insured deposits up to a certain threshold. That limit has risen sharply over the past 90 years, from $2,500 in 1933 to $250,000 in 2010 – the same limit in place today.

S&L crisis

The nation’s new and improved banking regulations ushered in a period of relative stability in the banking system that lasted about 50 years.

But in the 1980s, hundreds of the small banks known as savings and loan associations failed. Savings and loans, also called “thrifts,” were generally small local banks that mainly made mortgage loans to households and collected deposits from their local communities.

Beginning in 1979, the Federal Reserve began to hike interest rates very aggressively to fight the high inflation rates that had become entrenched.

By the early 1980s, Congress began allowing banks to pay market interest rates on depositers’ accounts. As a result, the interest rate S&Ls had to pay their customers was much higher than the interest income they were earning on the loans they had made in prior years. That imbalance caused many of them to lose money.

Even though about 1 in 3 S&Ls failed from around 1986 through 1992 – somewhere around 750 banks – most depositors at small S&Ls were protected by the FDIC’s then-$100,000 insurance limit. Ultimately, resolving that crisis cost taxpayers the equivalent of about $250 billion in today’s dollars.

Because the savings and loans industry was not directly connected to the big banks of that era, their collapse did not cause runs at the bigger institutions. Nevertheless, the S&L collapse and the government’s regulatory response did reduce the supply of credit to the economy.

As a result, the U.S. economy underwent a mild recession in the latter half of 1990 and first quarter of 1991. But the banking system escaped further distress for nearly two decades.

Great Recession

Against this backdrop of relative stability, Congress repealed most of Glass-Steagall in 1999 – eliminating Depression-era regulations that restricted the scope of businesses that banks could engage in.

Those changes contributed to what happened when, at the start of a recession that began in December 2007, the entire financial sector suffered a panic.

At that time, large banks, freed from the Depression-era restrictions on securities trading, as well as investment banks, hedge funds and other institutions outside the traditional banking system, had heavily invested in mortgage-backed securities, a kind of bond backed by pooled mortgage payments from lots of homeowners. These bonds were highly profitable amid the housing boom of that era, and they helped many financial institutions reap record profits.

But the Federal Reserve had been increasing interest rates since 2004 to slow the economy. By 2007, many households with adjustable-rate mortgages could no longer afford to make their larger-than-expected home loan payments. That led investors to fear a rash of mortgage defaults, and the values of securities backed by mortgages plunged.

It wasn’t possible to know which investment banks owned a lot of these vulnerable securities. Rather than wait to find out and risk not getting paid, most of the depositors rushed to get their money out by late 2007. This stampede led to cascading failures in 2008 and 2009, and the federal government responded with a series of big bailouts.

The government even bailed out General Motors and Chrysler, two of the country’s three largest automakers, in December 2008 to keep the industry from going bankrupt. That happened because the major car companies relied on the financial system to provide potential car buyers with credit to purchase or lease new cars. But when the financial system collapsed, buyers could no longer obtain credit to finance or lease new vehicles.

The Great Recession lasted until June 2009. Stock prices plummeted by more than 50%, and unemployment peaked at around 10% – the highest rate since the early 1980s.

As with the Great Depression, the government responded to this financial crisis with significant new regulations, including a new law known as the Dodd-Frank Act of 2010. It imposed stringent new requirements on banks with assets above $50 billion.

Close-knit customers

Congress rolled back some of Dodd-Frank’s most significant changes only eight years after lawmakers approved the measure.

Notably, the most stringent requirements were now reserved for banks with more than $250 billion in assets, up from $50 billion. That change, which Congress passed in 2018, paved the way for regional banks like SVB to rapidly expand with much less regulatory oversight.

But still, how could SVB collapse so suddenly and without any warning?

Banks take deposits to make loans. But a loan is a long-term contract. Mortgages, for example, can last for 30 years. And deposits can be withdrawn at any time. To reduce their risks, banks can invest in bonds and other securities that they can quickly sell in case they need funds for their customers.

In the case of SVB, the bank invested heavily in U.S. Treasury bonds. Those bonds do not have any default risk, as they are debt issued by the federal government. But their value declines when interest rates rise, as newer bonds pay higher rates compared with the older bonds.

SVB bought a lot of Treasury bonds it had on hand when interest rates were close to zero, but the Fed has been steadily raising interest rates since March 2022, and the yields available for new Treasuryssharply increased over the next 12 months. Some depositors became concerned that SVB might not be able to sell these bonds at a high enough price to repay all its customers.

Unfortunately for SVB, these depositors were very close-knit, with most in the tech sector or startups. They turned to social media, group text messages and other modern forms of rapid communication to share their fears – which quickly went viral.

Many large depositors all rushed at the same time to get their funds out. Unlike what happened nearly a century earlier during the Great Depression, they generally tried to withdraw their money online – without forming chaotic lines at bank branches.

Will more shoes drop?

The government allowed SVB, which is being sold to First Citizens Bank, and Signature Bank, a smaller financial institution, to fail. But it agreed to repay all depositors – including those with deposits above the $250,000 limit.

While the authorities have not explicitly guaranteed all deposits in the banking system, I see the bailout of all SVB depositors as a clear signal that the government is prepared to take extraordinary steps to protect deposits in the banking system and prevent an overall panic.

I believe that it is too soon to say whether these measures will work, especially as the Fed is still fighting inflation and raising interest rates. But at this point, major U.S. banks appear safe, though there are growing risks among the smaller regional banks.

This article originally appeared in The Conversation.

From Your Site Articles
  • Why SVB and Signature Bank failed so fast – and the US banking crisis isn’t over yet ›
Related Articles Around the Web
  • Silicon Valley Bank: How a digital bank run accelerated the collapse ... ›
banking crisis

Join an Upcoming Event

Civic Synergy Leadership Program

Civic Synergy
Jun 07, 2023 at 7:00 pm EDT
Read More

Civic Synergy Leadership Program

Civic Synergy
Jun 08, 2023 at 7:00 pm EDT
Read More

Civic Synergy Leadership Program

Civic Synergy
Jun 14, 2023 at 7:00 pm EDT
Read More

Civic Synergy Leadership Program

Civic Synergy
Jun 15, 2023 at 7:00 pm EDT
Read More

Civic Synergy Leadership Program

Civic Synergy
Jun 21, 2023 at 7:00 pm EDT
Read More

Civic Synergy Leadership Program

Civic Synergy
Jun 22, 2023 at 7:00 pm EDT
Read More
View All Events

Want to write
for The Fulcrum?

If you have something to say about ways to protect or repair our American democracy, we want to hear from you.

Submit
Get some Leverage Sign up for The Fulcrum Newsletter
Confirm that you are not a bot.
×
Follow
Contributors

Hypocrisy of pro-lifers being anti-LGBTQIA

Steve Corbin

A dangerous loss of trust

William Natbony

Shifting the narrative on homelessness in America

David L. Nevins

Reform in 2023: Leadership worth celebrating

Layla Zaidane

Two technology balancing acts

Dave Anderson

Reform in 2023: It’s time for the civil rights community to embrace independent voters

Jeremy Gruber
latest News

Three practical presidential pledges to promote national prosperity

James-Christian B. Blockwood
15h

Meet the Faces of Democracy: Justin Roebuck

Mia Minkin
15h

Podcast: Why Is Congressional Oversight Important, and How Can It Be Done Well? (with Elise Bean)

Kevin R. Kosar
Elise J. Bean
22h

Chipping away at election integrity: Virginia joins red state exodus from ERIC

David J. Toscano
30 May

Your Take on congressional incivility

Lennon Wesley III
26 May

White House plan to combat antisemitism needs to take on centuries of hatred, discrimination and even lynching in America

Pamela Nadell
26 May
Videos

Video: Honoring Memorial Day

Our Staff

Video: #ListenFirst Friday YOUnify & CPL

Our Staff

Video: What is the toll of racial violence on Black lives?

Our Staff

Video: What's next for migrants seeking asylum after Title 42

Our Staff

Video: An inside look at the campaign to repeal Pennsylvania’s closed primaries

Our Staff

Video: Where the immigration debate stands today

Our Staff
Podcasts

Podcast: AI revolution: Disaster or great leap forward?

Our Staff
25 May

Podcast: Can we fix America's financial crises?

Our Staff
23 May

Podcast: Gen Z's fight for democracy

Our Staff
22 May

Podcast: Political Football, Inc.

Our Staff
19 May
Recommended
Three practical presidential pledges to promote national prosperity

Three practical presidential pledges to promote national prosperity

Big Picture
Meet the Faces of Democracy: Justin Roebuck

Meet the Faces of Democracy: Justin Roebuck

State
Podcast: Why Is Congressional Oversight Important, and How Can It Be Done Well? (with Elise Bean)

Podcast: Why Is Congressional Oversight Important, and How Can It Be Done Well? (with Elise Bean)

Test Unlisted
Hypocrisy of pro-lifers being anti-LGBTQIA

Hypocrisy of pro-lifers being anti-LGBTQIA

Diversity Inclusion and Belonging
Chipping away at election integrity: 
Virginia joins red state exodus from ERIC

Chipping away at election integrity: Virginia joins red state exodus from ERIC

Big Picture
Video: Honoring Memorial Day

Video: Honoring Memorial Day