In the movie Mary Poppins, nine-year-old Michael Banks accidentally starts running a bank when he demands a two-pence coin.
A similar situation occurred in 2007, when crowds were seen outside Bank Northern Rock branches and thus the financial crisis of 2007-08 began.
A year later, the Bank of Bradford & Bingley also suffered bad times and Bank of England officials were seen patrolling outside its branches, but there were no queues.
However, now the situation of the banks is changing and it is becoming difficult to control the situation when this kind of panic sets in.
I have often wondered what the crisis of 2007-08 would have been like in the age of Twitter, Facebook, Instagram and TikTok.
This month’s banking crisis is helping to answer this question indirectly.
According to US central banker Jerome Powell, Silicon Valley Bank is the fastest growing bank in US history. His Vice Chairman Michael Barr told the US Senate yesterday that ‘There was a rumor on social media that this bank may also face a crisis and people who had kept money in the bank without insurance, immediately withdrew. It was easy to withdraw money and 40 billion dollars were withdrawn from the bank in one day.
The next day, Bank SVB “feared that even more money would be withdrawn” and thus there was “a palpable panic among the people who had deposited the money.”
These sums are mind-boggling and have reached from one continent to another. The Bank of England told its MPs on Monday that people had withdrawn three billion pounds, or 30% of the money held here, from SVB UK in a single day.
“The lesson we can learn from Silicon Valley Bank is how quickly people can withdraw money from banks in the age of social media,” Bank of England Governor Andrew Bailey said earlier this week. Also, how social media can be used to a disadvantage in the age of digital banking. It’s very different from the queue outside Northern Rock 15 years ago.
100 meter sprint
Andrew Bayley also talked about changing the rules around bank protection to see if they ‘have the ability to cope with this situation.’
This situation is actually caused by the convergence of internet banking and social media, which means that systems that were built on trust, confidence and belief are now exposed to the greatest risks.
On messaging apps WhatsApp and Slack, big names in the technology sector also appear to be advising companies to cash out.
What happened to SVB was actually the 100m world record Olympic bank sprint. While SVB had its own particular situation and its depositors belonged to the same industry and most of their funds were not insured, the concerns apply broadly.
In a search termed ‘bank run’ on major social media websites over the past two weeks, celebrities from various fields suggested consumers to withdraw money from banks.
One of the reasons for this is the lack of trust in general experts and those who specialize in cryptocurrency. One of the reasons for the success of Bitcoin and crypto is that online banking has been heavily criticized. There are now a majority of people who were not there during the financial crisis of 2008.
What has made things more complicated during all this is what is and is not included in a bank deposit guarantee in the US. It would be right to say that the weakness of the system based on trust has been exposed due to the atmosphere of mistrust on social media. Therefore, there may be a need for administrative action in this regard.
Sam Woods, head of the Bank of England’s regulator the Prudential Regulation Authority, told MPs yesterday that he would have to change his views on the pace of withdrawals from banks.
According to the ‘Liquidity Coverage Ratio’, a bank can lose only zero to 20 percent of retail deposits or 20 to 40 percent of corporate deposits in a month’s time.
It is also important to remind here that SVB UK lost 30% of deposits in one day. The existing norms are likely to be amended but the downside is that it will reduce the banks’ ability to lend economically.
Perhaps this is a reaction to the special case of SVB. It can also be an attempt to maintain balance. Other regulatory bodies are also thinking about amending this. Criticism in this regard is quite legitimate, but it is difficult to imagine at this time that businesses can use banking facilities and issue salaries through them and keep their deposits safe through dozens of bank accounts.
The good news is that the UK’s regulatory system is currently working well, but the way we measure the safety of banks could change with this month’s ‘insta-run’.