[Bankdemic One Month] ③ Real-Time Bank Run Speed and Path Differed from Previous Crises

Fear Grows as Asset Movement and Information Spread Accelerate

Editor's NoteThe global "Bankdemic" (bank + pandemic), which started with the Silicon Valley Bank (SVB) in the United States, toppled Credit Suisse (CS) in Europe, and shook Deutsche Bank, is approaching its one-month mark. Although these three banks share the common denominator of being caught in a sudden vortex of crisis, much like an infectious disease spreading, each showed different aspects regarding the root causes and responsibilities of the crisis. While the betrayal of safe assets amid high interest rates is cited as the fundamental cause of the Bankdemic, inadequate internal controls, the spread of irrational fear, and ultra-fast bank runs through mobile banking also exacerbated the situation. However, the fact that characteristic phenomena such as real-time bank runs and irrational market fear occurred commonly and rapidly brought down the banks left an impression similar to the spread of an epidemic. Although the transmission of the crisis seems to have stopped due to swift responses by various countries, it is still too early to be complacent. Jamie Dimon, CEO of JP Morgan Chase, known as the "Emperor of Wall Street," warned in his annual shareholder letter released on the 4th (local time) that the recent banking crisis is not over. It is expected to have repercussions on the overall economy for years to come.

The three banks at the center of the so-called "Bankdemic" concerns?from Silicon Valley Bank (SVB), the funding source for U.S. startups, to Credit Suisse (CS) and Deutsche Bank?exhibited characteristic phenomena such as "real-time bank runs" and "irrational market fear." These were cited as reasons why governments worldwide responded swiftly to the crisis.

Bankdemic: Different Speeds and Paths

[Image source=Reuters Yonhap News]

This crisis differed markedly from past ones in terms of speed and trajectory. A representative example is SVB, which had invested most of its assets in U.S. Treasury bonds, a symbol of safe assets, and went bankrupt in just 36 hours due to unrealized book losses.

On the first day of the crisis, March 9, SVB saw $42 billion (approximately 55.6 trillion KRW), equivalent to a quarter of its total assets, withdrawn. The next day, the bank run reached $100 billion. Michael Barr, Vice Chair for Supervision at the Federal Reserve, who appeared at a congressional hearing at the end of March, described it as an "astonishing speed and scale."

The rapid, large-scale bank run in such a short time was largely driven by social media (SNS) and digital banking. Information and anxiety spread quickly through SNS, and digital banking, represented by smartphones and the internet, translated that into a bank run.

Signature Bank in New York, which was closed shortly after the SVB incident, also saw $10 billion, about 20% of its total deposits, withdrawn in a single day on March 10 through digital banking.

The Wall Street Journal (WSJ) analyzed that "the spread of news via SNS and the spasmodic reactions of startup executives, which were not factors during the financial crisis, worsened the situation."

In the case of CS, news that the Saudi National Bank (SNB) drew a line on additional financial support triggered market anxiety. The stock price immediately plunged double digits that day, and the credit default swap (CDS) premium, indicating default risk, soared several times. As asset movement and information dissemination accelerated, the contagion of fear spread instantly. Experts evaluated that investors and depositors in this banking crisis reacted much more sensitively and quickly to the possibility of asset deterioration than in the past.

The 'Irrational Market' at the Peak of the Bankdemic

[Image source=Yonhap News]

At the peak of Bankdemic concerns was Deutsche Bank, Germany's largest investment bank. Despite no significant bad assets threatening the bank's soundness, Deutsche Bank was suddenly engulfed in crisis rumors at the end of March, demonstrating the deep and sensitive distrust investors had toward the banking sector. When Deutsche Bank's stock price plummeted, Andrew Coombs, a Citibank analyst, diagnosed that "there is no explanation other than an irrational market." The vague fear that swept the market after bonds issued by CS became worthless during the acquisition process led to Deutsche Bank being chosen as the next target.

Irrational fear and distrust tend to break the weakest links first. Although various information pours in as fear spreads, there is no time to verify each piece, leading to an era where a "Minsky moment" (the moment when excessive debt ends a boom and asset values collapse) is reached.

The Guardian daily pointed out that "banks are inherently unstable businesses due to the mismatch between loan and deposit durations," emphasizing that "trust in a bank's survival is crucial." Large investment banks like CS have been subject to stricter regulatory supervision than others, and SVB complied with liquidity and capital regulations, but once trust in their solvency collapsed, they inevitably fell quickly.

Additionally, despite rapid changes in the financial market environment due to digitalization and other factors, the lack of institutional mechanisms to control these changes was also cited as a problem in this crisis.

The Bankdemic Is Not Over Yet

Recently, Bankdemic fears have gradually subsided as banks engulfed in crisis found new owners following swift intervention by authorities.

However, caution remains in the market. There are concerns that banking regulations will tighten and credit crunches will follow due to this crisis. If the burden of accumulated tight monetary policies combines with a contraction in lending, it will inevitably weigh heavily on the economy. Leverage issues such as household loans and real estate, which have grown during the prolonged low-interest-rate environment, are also considered potential time bombs that could explode at any time.

This content was produced with the assistance of AI translation services.