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

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 Treasurys sharply 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.

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 is republished from The Conversation, an independent nonprofit news site dedicated to sharing ideas from academic experts. Like this article? Subscribe to our weekly newsletter.

Rodney Ramcharan does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.