Why investor brains were hard-wired for bank runs at SVB, Signature

Customer withdrawal due to panic Imploding Silicon Valley Bank and Signature Bank, and shocking financial markets and the broader banking system, the incident taught a profound lesson in human psychology.

In this case, experts say, an understandable “behavioral bias” led to bad economic outcomes.

“Psychology brings a lot of extra risk to the world,” said Harold Shefflin, a behavioral finance expert and professor of finance at Santa Clara University. I’ve taken that risk since.”

Our brains are hardwired for bank crackdowns.

Humans have evolved to be social creatures that thrive in groups, said Dan Egan, vice president of behavioral finance and investments at Betterment. That’s why we care so much about what other people think and do.

There are firewalls against this kind of behavior.of Federal Deposit Insurance Corporationor the FDIC to help bank customers save up to $250,000.

This insurance program was created in 1933. collapsed Thousands of banks in quick succession.

FDIC insurance is intended to instill confidence that the government will return up to $250,000 per depositor, per bank, per ownership category to customers in the event of a bank failure.

“Before the FDIC, massive cash demands by frightened depositors were often fatal to banks that might otherwise have survived.” Chronicle About the history of the agency.

SVB’s customer base included many companies such as technology start-ups with high uninsured deposits (i.e. more than $250,000 in deposits). About 95% of the bank’s deposits were uninsured as of December, according to SEC filings.

That failure illustrates some principles of behavioral finance.

One is “information asymmetry,” a concept popularized by economist and Nobel laureate George Akerloff, Sheflin said. Akerlov, husband of Treasury Secretary Janet Yellen, analyzed How markets can collapse in the presence of asymmetric (or unequal) information.

His 1970 essay “The Market For Lemons” focuses on the market for old and defective used cars (colloquially known as lemons). But information asymmetries apply to many markets and contributed to the failure of Silicon Valley Bank, he said.

The bank said on March 8 that it was looking to raise money by selling $21 billion in loss-making securities. The announcement sparked panic, amplified by social media. Customers saw their peers rush to exit, didn’t have the time (or perhaps the insight) to read the bank’s financial statements and determine if the bank was in dire straits, Sheflin said. said.

Rational market theory predicts that customers with uninsured deposits—the majority of them—will move to protect themselves and secure their savings, he said.

“If you have more than $250,000 in the bank, you have to assume the worst if you don’t have the information,” Shefrin said. “And, unfortunately, it makes sense for you to participate.”

Hence the bank run.

However, the same rationale does not necessarily apply to customers of banks whose deposits are fully insured.

“If you have less than $250,000 in assets and don’t need to run a paycheck or support a family, there’s no need to rush,” says Meir Stutman, a behavioral finance expert and professor of finance at Santa Clara University. None.” [withdrawing your money] It is neither rational nor wise. ”

Bank officials also showed psychological “failure” when they first announced their need for funding, Shefrin said. They did not understand the concept of “market signaling” and could not predict how their communication would cause panic.

“If the market doesn’t have a rational understanding of how to interpret signals, it can make mistakes like the Silicon Valley banks,” Shefrin said.

Depositors’ fears also appear to be amplified by behavioral biases, according to Egan.

Storing all your deposits in a bank with a like-minded tech founder may mean customers simultaneously experience the same fears akin to Echo Chambers, he said.

Spreading savings over $250,000 across multiple banks so that no one account exceeds the FDIC insurance limit is a reasonable solution to reducing stress and fear. Mr Egan said.

The Biden administration stepped in on Sunday to assuage depositor concerns. Regulators backed all uninsured deposits of SVB and signatory banks to fund troubled banks. On Thursday, his 11 banks on Wall Street injected her $30 billion into First Republic Bank, a small bank that appeared to be on the brink of bankruptcy, to shore up confidence in the banking system. Did.

Mark Zandy, chief economist at Moody’s Analytics, said there was “no reason” for depositors to run for the door given recent government backstops.

“But confidence is a very fickle thing,” said Zandi. “Today it’s here, tomorrow it’s gone”