California regulator cites social media, digital banking as key factors in Silicon Valley Bank’s failure

California’s chief banking regulator took its fair share of blame Monday for Silicon Valley Bank’s collapse, admitting that the department was slow to demand fixes at the troubled institution — too slow for an era in which social media and mobile banking could combine to drive an unprecedented run on the bank’s deposits.

The report, by the California Department of Financial Protection and Innovation, pointed to those two underlying factors as pivotal in the regional bank’s March 10 failure. “While many internal factors made Silicon Valley Bank susceptible to a bank run, both social media and digital banking technology accelerated the volume and speed of the deposit outflows,” the report stated.

But for all their candor, the report’s authors stopped short of articulating in detail what steps regulators and banks could take to prevent similar panics in the future.

The report noted that prior to its collapse, Silicon Valley Bank had adequate liquidity to absorb $16 billion in withdrawls in a single day — which was almost as much as the $16.7 billion withdrawn from Washington Mutual over 10 days in 2008 prior to its collapse. On March 9, however, Silicon Valley Bank received deposit withdrawal requests of $42 billion in eight hours.

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The report said the department would “discuss with bank management what kind of social media monitoring a bank is conducting and how the bank intends to confront reputational and public relations concerns in the digital age.” It also promised to provide training to its bank examiners to better assess those risks.

Ed Moya, a senior market analyst with Oanda, a foreign exchange trading platform, said the report showed that the failure of Silicon Valley Bank and other banks this year after the Federal Reserve Board’s increase in interest rates indicated that efforts to improve regulations are a “work in progress” amid the digital-banking revolution.

“Wall Street is quickly realizing that the future of digital banking means bank runs can happen with a couple social media posts,” he said. “We live in a different world that will always have elevated banking run risk until more protections are put in place.”

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The department took possession of the Santa Clara, Calif.-based bank March 10 after the fatal run on deposits, prompted by the bank’s disclosure it had sold a portfolio of long-term bonds at a $1.8-billion loss and was seeking to raise $2.25 billion in capital. The Fed’s campaign to tamp down inflation by raising rates made the bonds, which carried lower interest rates, worth far less.

The bank also faced unusual risk since its deposit base was highly concentrated in the tech industry and 93.8% of its deposits, totaling $151.6 billion, were uninsured, the highest ratio of any large U.S. bank, the report said. The Federal Deposit Insurance Corp. insures deposits up to $250,000. Three days after the failure, amid concerns that the failure would start a widespread bank panic, the FDIC announced it would guarantee all of the bank’s deposits.

Although the report highlighted risk and other mismangement by the bank, it focused on the department’s role in the failure and included other steps that the department could take on its own to improve its regulation. Among them are the department’s pledge to better coordinate with federal regulators, ensure more personnel are assigned in a timely manner to fast-growing banks with assets of more than $50 billion and to better track the level of uninsured deposits.

Moya applauded the department’s efforts to improve and speed up its regulatory process but worried that the speed of bank runs will result in higher capital requirements for banks, which will slow down lending.

“Banking jitters won’t be going away anytime soon and any proposed rule changes should provide more protection for investors,” he said. “Banks will likely need to bolster their balance sheets, which means lending will take an even greater hit and that will help send this economy quickly into a recession.”

The seizure of Silicon Valley Bank came after the voluntary shutdown of crypto-focused Silvergate Bank in San Diego just days before — and set off a wave of bank stock sell-offs and deposit withdrawals that took down Signature Bank in New York on March 12 and First Republic Bank in San Francisco on May 1.

First–Citizens Bank & Trust Co. of Raleigh, N.C., acquired Silicon Valley Bank on March 17, while Signature and First Republic were also sold off.

The Fed issued its own report on Silicon Valley Bank’s failure on April 28 that took aim at the bank’s board and management — but also its own supervisory policy following the passage of a 2018 law signed by President Trump that eased regulations for banks with fewer than $250 billion in deposits.

The report has turned into a political football on Capitol Hill as Democrats seek to reinstate the tighter regulations of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the 2010 law that enacted the tough banking reforms.