Rapid Bank Runs Reveal Deposits Are Now Magic Internet Money, Too

One thing that has separated traditional banking from crypto, in the eyes of many financial experts, is stability. It’s a strong belief that most people who deposit money into an account at a prominent bank usually want to leave it there indefinitely – be it for comfort, satisfaction, relationships, laziness, any number of things.

That level of constancy or loyalty hardly exists in crypto – evidenced by the lightning-fast withdrawals of deposits in 2022 from digital asset firms Celsius Network, FTX and Voyager Digital as soon as there was a hint of trouble, or even a hint that other depositors might jump ship.

But the recent failures of Credit Suisse, Silicon Valley Bank (SVB) and Signature Bank have shown the potential for astonishingly rapid deposit runs at traditional banks as well. It has been a nasty surprise for industry leaders and regulators alike, a sign of how dominant (and easy) online banking has become, with updates on social media each time feeding the rumor mill and increasing fragility.

So if customers sitting anywhere in the world with an Internet connection can instantly move their money from one bank to another, the question arises of how different the traditional setup looks compared to notoriously fickle crypto, barring the apparent government backstop.

None other than central bank governor Jerome Powell remarked on Wednesday during a press conference that the deposit run at SVB was “faster than the historical record suggests.”

“The speed of the run — it’s very different from what we’ve seen in the past,” Powell said.

Banks are built on the idea that most customer deposits are “sticky” – thought of as a form of long-term funding even when they can technically be redeemed on demand. Because of the expectation that the funds will not be withdrawn at a moment’s notice, banks then lend the money to mortgage borrowers, car buyers, credit card users, corporations and real estate developers, or sometimes invest the money in long-term bonds that may not pay off for several years .

The dynamic has monstrous long-term implications for the traditional economy and financial system: If banks cannot rely on deposit funding, they may think twice about extending long-term credit. Customers reportedly withdrew $42 billion from SVB in a single day, March 9, the Wall Street Journal reported.

However, crypto’s reputation could benefit — or at least not look so bad by comparison — if fast Internet money is increasingly seen as the norm rather than an undesirable feature of newfangled, blockchain-based finance.

“It’s a new world of very fast digital runs at the bank,” said Lex Sokolin, head of crypto economics at ConsenSys.

Banking experts say the arrival of ultra-fast-moving deposits could represent one of the most fundamental changes in the industry’s history. Sure, online banking has been around for a while, but never before has online banking been so widespread during a banking panic.

In the age of the internet, it only takes a few clicks and a few seconds to transfer deposits from one bank account to another. When in doubt that your money is not safe, just park it in another online bank account.

Rumors – or even worrying, confirmed facts – spread quickly on Twitter, politicians’ press releases or online news reports. When people decide to play it safe rather than regret, bank runs can start within days or hours.

The Federal Reserve, the Department of Treasury and the Federal Deposit Insurance Corporation (FDIC) said in a joint statement on March 13 that all deposit accounts at both Silicon Valley Bank and Signature Bank will be guaranteed.

“Despite the central bank’s aggressive actions, confidence in the banking system — particularly in small and medium-sized regional banks — remains fragile, as much uncertainty and concern remains,” National Chief Economist Kathy Bostjancic wrote in a note from Wednesday’s Federal Open. Market committee meeting.

For crypto traders, phrases like “lack of confidence” and “uncertainty” sound very familiar, and government officials have long used the risk of “runs” as the main reason why crypto, especially stablecoins, is not a safe option for parking savings. .

Cryptocurrencies have been growing since the start of what some call a “banking crisis.” Bitcoin (BTC) hit $28,000 for the first time in nine months on Monday.

Already, crypto-friendly commentators are starting to revive the narrative that bitcoin can be a safe haven — say, if the Fed needs to print more money to prop up the banking system. Asked about the Fed’s new emergency lending programs for banks created in the wake of the SVB and Signature failures, Powell said at the press conference that “it has the intended effect of strengthening confidence in the banking system.”

With 2022’s wounds still fresh, it’s probably a stretch at this point to claim that crypto is a safe haven, but it’s not crazy to expect that perceptions of the stability of the banking system may now be due for a reassessment similar to what the crypto industry experienced in 2022.

The 513-page “Economic Report of the President,” published Monday by the White House Council of Economic Advisers, devoted nearly an entire page to describing how the government’s financial safety net had helped meet the banking panic of 1907, which culminated in a bailout from financier JP Morgan.

“Fast forward 100 years, and proponents of digital assets now hope to create a decentralized financial system without relying on governments and their regulatory frameworks,” according to the report. Crypto’s “followers have learned again the lessons of the previous financial crises the hard way.”

The messy and rapid liquidation of several heavily monitored banks in the past month suggests that managers and regulators in traditional finance also have something to learn anew.

“A fragile banking system is likely to encourage investors, especially of the younger generation, to keep at least some of their wealth in an ‘insurance asset’ like bitcoin,” said Noelle Acheson, former head of research at CoinDesk and Genesis Trading.