You are allowed to yell “fire!” in a crowded theater. Contrary to a popular myth, there is no U.S. law stopping you. This past wee

Why Bank Runs Happen—and What We Can Do to Stop the Panic

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2023-03-14 18:00:04

You are allowed to yell “fire!” in a crowded theater. Contrary to a popular myth, there is no U.S. law stopping you.

This past weekend, in our 21st-century theater—Twitter—economists and venture capitalists were screaming it at the top of their lungs, warning the rest of us about the meltdown of Silicon Valley Bank and the broader panic they were sure it portended.

Within 48 hours, the sixteenth largest bank in the United States (and the bank of choice for many tech start-ups) had been shuttered by the feds. Around $42 billion in deposits were withdrawn on Thursday alone.

SVB was the victim of an old-fashioned bank run. People—in this case, mostly companies—became nervous about the safety of their deposits and rushed to pull their money out. The bank, which had $210 billion under management going into 2023, saw $42 billion get pulled, unexpectedly, in a single day—more than $1 million per second.

Except it wasn’t exactly an “old-fashioned” bank run. House Financial Services Committee Chair Patrick McHenry called SVB’s collapse “the first Twitter fueled bank run.” In other words, this bank run was a particularly modern one—a panic aided by technology that has taken ancient human impulses and put them on warp speed.