We’ve read — and written — a lot about how bank troubles could impact the economy.
But for all the hand-wringing over inflation and growth, I’m not sure we’ve fully processed how the first Internet-fueled bank run could change how we think about markets and the world around us.
One of the most important lessons for the 21st century investor is that perception can matter more than reality. It’s the genesis behind good news leading to a stock selloff.
But a few weeks ago, we saw the havoc that perception can cause if it extends to the financial system.
How bank runs happen
Bank runs are a tale as old as time. Banks operate by loaning out or investing the money that you deposit with them, with safeguards to ensure that they have enough money to fulfill a certain amount of withdrawals. When a bunch of people get worried — either about an institution or the stability of the financial system — and they take their money out of the bank, the stress overwhelms the system in place.
This isn’t a recent phenomenon — we have documented instances of this happening back to the early 1900s. But this most recent bank run was different. It happened online, not at bank branches — and it came together at a breathtaking pace. Congress hearings this week revealed that Silicon Valley Bank customers pulled $42 billion in deposits on March 9, and were ready to withdraw another $100 billion the next day before the government stepped in.
From there, fear spread like wildfire. Deposit withdrawals for smaller banks were the biggest since 2007 in the week ending March 15. Rumors started swirling about other banks at risk, which exacerbated the panic. The Fed ended up stepping in just days later with about $300 billion in emergency funding for struggling banks. Just a few days after that, the government brokered a deal for the biggest banks to send deposits to First Republic, another ailing mid-sized bank.
The gathering storm clouds
In retrospect, it seems like the storm clouds were gathering long before SVB made headlines.
Every quarter, we survey 10,000 investors globally about what they’re thinking about and doing with their money. As it turns out, US investors were already on edge about economic risks and conscientious about their cash.
Over the past year, investors have steadily shifted their portfolios into cash, whether for future market opportunities or to build up an emergency fund, according to the US segment of our Retail Investor Beat survey. And 21% of investors cited a recession as the biggest risk to their portfolios over the next 12 months, with rising inflation a close second.
They’re also especially exposed to the traditional financial system — an unsurprising fact, but one that contributed to how quickly the bank run transpired. 80% of US investors we surveyed said they have a savings account, and 42% noted that they’re invested in financial stocks — the second-most popular sector behind tech. There are trust issues with traditional systems, too, with 27% of crypto investors noting they hold crypto for its decentralized properties.
Perception was already in a fragile state. Add in social media — one of the most popular ways to get news and investment ideas these days — and suddenly, you have the recipe for a change in mood that can take down a decent-sized bank in a matter of days.
What happens next?
Now, I’m not excusing the alleged poor-decision making at SVB that led to this mess, or its uniquely concentrated customer base that fanned the flames. You also can’t ignore the fact that this has happened before — remember the meme stock frenzy?
However, this particular situation casts a light on how sensitive our financial system is to public perception. It’s not just a market phenomenon any more — it’s caught up to the core of the economy – and there are consequences for investors and consumers that could come from this vulnerability.
Banks may be turning into a public utility. There have been a lot of theories thrown around for what comes next for banks — blanket deposit insurance, more laws, higher reporting standards, new business models.
But no matter what happens next, it’s becoming more obvious that the government is increasingly entangled with banks. On Thursday, the Biden administration proposed stricter laws on small and mid-sized banks in the wake of the SVB news. More regulatory oversight is understandable, but it may restrict banks’ earnings potential through lower growth and higher costs. This could be especially crushing for smaller banks, which are already in a tough spot with deposit flight and tighter lending conditions. The big could get bigger, and more people could turn to decentralized alternatives.
New regulation could look different, too. After the financial crisis, new laws aimed to ensure banks had enough money on hand and that they properly understood their credit risk. But I’m not sure the size of capital ratios and the amount of risk-weighted assets matter as much if the speed of money movement isn’t addressed.
Markets are moving faster than ever. You can see it on charts, in headlines — and sometimes, in your portfolio. The fast-twitch nature of investor behavior is a reflection of what we see outside of markets, too. The world is frictionless, and that allows us to change at the drop of the hat. More opportunities, but more instability and unintended consequences.
And in response, policy seems to be moving quicker too. That’s why you saw the Fed step in with emergency funding just days after SVB failed. What seemed like an anomaly during COVID — a fast and forceful response — has become precedent. No matter your stance on the Fed, you have to adjust for this as an investor. It may be more difficult to make big, bold calls in either direction.
It’s not just about bulls and bears, either. Lightning-fast markets can have ramifications for how companies manage their balance sheets, communicate with shareholders, and navigate their business strategies.
Why perception matters
You can put the blame on several parties for the meltdown in banks. But in my eyes, social media and public perception delivered the most sizable blow.
The pressure was building for a while, and the economic impact seems contained for now. But regardless of what happens with growth, there could still be consequences for your portfolio.
*Data sourced through Bloomberg. Can be made available upon request.
**The Q1 2023 Retail Investor Beat was based on a survey of 10,000 retail investors across 13 countries and 3 continents. The following countries had 1,000 respondents: UK, US, Germany, France, Australia, Italy and Spain. The following countries had 500 respondents: Netherlands, Denmark, Norway, Poland, Romania and the Czech Republic.