Silicon Valley Bank, the 16th largest US bank, experienced rapid growth as its deposits skyrocketed from $60 billion to $200 billion from 2020 to March 2022. To leverage these deposits, the bank invested heavily in long-term treasury bonds. As interest rates rose, the value of these bonds decreased. Accounting rules initially allowed the bank to avoid marking these losses, but when deposits began to leave, the bank had to sell securities and recognize $1.8 billion in losses.

In an attempt to cover these losses, the bank planned a $2.25 billion equity offering, but it failed even though General Atlantic, a large private equity firm, was willing to buy a significant portion. This failure was followed by a massive outflow of deposits and a run on the bank, triggered by venture capitalist Peter Thiel urging people to withdraw their money.

Silicon Valley Bank’s collapse can be attributed to poor risk management, poor regulatory oversight, government intervention but also to effects of social media. The bank violated two basic risk management rules for banks: diversifying assets and having diverse funding sources. Its investments were mainly exposed to interest rate risk, and its funding sources were undiversified, as most deposits came from startups connected through venture capital firms. All sounds logical, and should and been noticed by an experienced banker and by a regulator as a problem.

Regulatory oversight also failed in this case. The Federal Reserve was under the false assumption that interest rates would stay low for an extended period, which affected their stress tests and expectations. The Fed’s belief in perpetually low interest rates was a fundamental issue. So even when conducting stress tests of large and systematically important banks their scenarios were of 2% interest rate changes, while that same FED raised interest rates for 5%.

The rapid spread of news through social media channels played a significant role in exacerbating the situation. Peter Thiel may have had some responsibility for triggering the run, but once he realized the bank’s fate, he had an obligation to inform those he dealt with about the impending crisis.

The failure of Silicon Valley Bank has raised concerns about the implications for the broader banking sector. Depositors seeking higher yields could cause other banks to face similar challenges. Interestingly, in Europe this issue could be even larger as open banking regulations have reduced the costs of switching banks, making it easier for customers to move their funds and potentially increasing the likelihood of bank runs. This development emphasizes the need for banks to offer competitive services and rates to retain their customers.

This situation also highlights the importance of banks managing their asset-liability mix to ensure they can withstand fluctuations in deposits. Regulators should have paid closer attention to the bank’s rapid growth and other red flags.

The effectiveness of stress tests can also been called into question, as they never reveal all the factors at play in a bank’s stability. For example, stress tests would not account for a social media-driven bank run, as seen in the case of Silicon Valley Bank. These are difficult to account for, but are becoming the new reality, and I would not exclude that the next bank run in Europe will be driven by social media.