In recent times, the world of finance has witnessed some unprecedented events that have challenged traditional banking models. From the rise of cryptocurrency to the recent spate of bank runs, the industry is rapidly evolving, and experts are struggling to keep up.
The recent deposit run at Silicon Valley Bank (SVB) is one such example. The bank run was not like anything seen before in the traditional banking system, as customers withdrew $42 billion on a single day, March 9, as reported by The Wall Street Journal. Federal Reserve Chair Jerome Powell has also acknowledged that the speed of the run was “very different from what we’ve seen in the past.”
This event has raised questions about the stability of the traditional banking system. While traditional banks have always been considered to be more stable than cryptocurrency, recent events have challenged this perception. Most people who deposit their money in a traditional bank are thought to leave it there for the long term. This constancy or loyalty is rarely seen in the cryptocurrency space, where withdrawals can be made almost instantaneously.
The recent failures of Credit Suisse, Silicon Valley Bank, and Signature Bank have shown that traditional banks can also be vulnerable to deposit runs. The rise of online banking has made it easier for customers to move their money from one bank to another in a matter of seconds. The fragility of traditional banking has been amplified by the prevalence of social media, which fuels the rumor mill and adds to the instability.
One of the cornerstones of traditional banking is the expectation that customer deposits are “sticky.” This means that the bank can rely on the funds to be there for the long term, which enables them to lend money to home buyers, car buyers, credit card users, companies, and real estate developers. However, if banks can’t depend on deposit funding, they may think twice about providing long-term credit.
The advent of high-speed deposits has the potential to bring about a seismic shift in the history of the banking industry. Although online banking has been in existence for some time, it has never been as ubiquitous during a banking crisis. The sight of customers lining up outside branches of Silicon Valley Bank in the hopes of speaking to a teller may seem quaint or even absurd, were it not for the tragic circumstances that necessitated it. It turned out that the degens and tech company treasurers, working from their computers, were the first to respond.
Thanks to the Internet, it now only takes a few clicks and a matter of seconds to transfer deposits from one bank account to another. In the event of doubts about the safety of one’s money, individuals can easily park their funds in a different online banking account. Rumours, or even confirmed facts that are concerning, can spread rapidly on platforms like Twitter, politicians’ press releases, or online news outlets. When people opt to err on the side of caution, instead of taking unnecessary risks, bank runs can begin within days or even hours.
The recent deposit runs have also highlighted the need for greater transparency in the banking system. Customers need to be aware of the risks they are taking when depositing their money in a bank. The Federal Reserve, the Department of Treasury, and the Federal Deposit Insurance Corporation (FDIC) have announced that all deposit accounts at both Silicon Valley Bank and Signature Bank will be guaranteed. However, this is not a guarantee that the same will happen in the future.
In conclusion, the recent events in the banking industry have challenged the traditional models and highlighted the need for greater transparency and stability. The rise of online banking has made it easier for customers to move their money from one bank to another, and this has added to the fragility of the system. It remains to be seen how the banking industry will adapt to these changes, but one thing is clear: the status quo is no longer an option.
