The Great Digital Divide: Panic at Twitter Speed, Respond at AOL Speed

In The New Madness of Crowds I argued that SVB failed because “Greater transparency and lower transaction costs have intensified the madness of the masses and expanded their reach.” A piece by Miao, Zuckerman and Eisen in the WSJ now adds to to the other side of the problem. Depositors were working on twitter time, the regulatory apparatus was not.

Depositors were draining their accounts via smartphone apps and telling their startup networks to do the same. But inside Silicon Valley Bank, executives were trying to navigate the U.S. banking system’s creaky apparatus for emergency lending and to persuade its custodian bank to stay open late to handle a multibillion-dollar transfer.

As Matt Levine summarizes:

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.

But the other part of the problem is that, while depositors can panic faster and banks can give them their money faster, the lender-of-last-resort system on which all of this relies is still stuck in a slower, more leisurely era. “When the user interface improves faster than the core system, it means customers can act faster than the bank can react,” wrote Byrne Hobart. You can panic in an instant and withdraw your money with an app, but the bank can’t get more money without a series of phone calls and test trades that can only happen during regular business hours.

It’s not obvious whether the right thing to do is slow down depositors, at least in some circumstances, or speed up regulators but the two systems can’t work well at different speeds.


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