by Jason Snell
When bank runs run faster than banks
Hannah Miao, Gregory Zuckerman and Ben Eisen reporting for the Wall Street Journal (Apple News) about the last-ditch attempts to save Silicon Valley Bank (SVB) from running out of money:
The Fed needed a test trade to be run before the actual transfer could occur. That took time and the Fed didn’t extend its own daily deadline of 4 p.m. PT for collateral transfers to help SVB. Time ran out on the bankers and SVB couldn’t get the money that day…
The next day, the BNY transfer to the Fed went through, potentially allowing SVB to borrow from the central bank. According to people familiar with the matter, the San Francisco FHLB was still working on its transfer when executives saw an announcement from the Federal Deposit Insurance Corp.: The regulator had taken over SVB.
As usual, I can’t recommend Bloomberg Money Stuff columnist Matt Levine’s take highly enough:
[Miao, Zuckerman and Eisen] have the actual, horrifying explanation, which is that the Fed’s computers go to bed at 4 p.m. and you can’t wake them up until the next morning….
I do not actually think that the banking crisis of the last two weeks… all could have been avoided if the Fed had said “hmm, normally we do a test transaction first, but you seem to be in a rush and it’s getting toward closing time so we’ll just skip that and go straight to lending you the money.” SVB’s problems were bigger than the Fed’s 4 p.m. transfer cutoff.
And yet! Man! What the heck! A lot has been written about how SVB was a bank run for a speedier, modern age. Instead of hearing a rumor at the coffee shop and running down to the bank branch to wait on line to withdraw your money, now you can hear a rumor on Twitter or the group chat and use an app to withdraw money instantly. A tech-friendly bank with a highly digitally connected set of depositors can lose 25% of its deposits in hours, which did not seem conceivable in previous eras of bank runs.
Or as Byrne Hobart of The Diff (quoted by Levine) put it, “when the user interface improves faster than the core system, it means customers can act faster than the bank can react.”
Back to Levine:
There will be all sorts of proposals for changes in bank regulation and supervision and deposit insurance and Fed facilities that come out of this crisis. [This] is probably not going to be top of the list: Again, I doubt it would have saved SVB, and I do not have any great technical insights into how it should be improved. But, I don’t know, wouldn’t it be a good idea? Wouldn’t you have more confidence in the banking system, if banks that had lots of assets could get money when they needed it?
It’s disturbing to think that the systems to save banks just don’t run as fast as the systems that have been built to streamline transactions that can lead to bank runs. More disturbing, perhaps, is to realize that this incident might not actually change anything.