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

One thing that has distinguished traditional banking from crypto, in the eyes of many financial experts, is stability. There's a strong belief that most people who put money into an account at a prominent bank will generally leave it there, indefinitely – whether due to comfort, satisfaction, relationships, laziness, lots of things.

That level of constancy or loyalty hardly prevails in crypto – evidenced by the lightning-fast withdrawals of deposits in 2022 from the digital-asset firms Celsius Network, FTX and Voyager Digital, as soon as a whiff of troubles arose, or even a whiff that other depositors might be jumping ship.

But the recent failures at Credit Suisse, Silicon Valley Bank (SVB) and Signature Bank have shown the potential for stunningly swift deposit runs at traditional banks, too. It's been a nasty surprise for industry executives and regulators alike, a sign of just how predominant (and easy) online banking has become, with by-the-second updates on social media fueling the rumor mill and adding to the 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 that traditional setup looks compared to notoriously fickle crypto, aside from the ostensible government backstop.

None other than Federal Reserve Chair Jerome Powell noted Wednesday during a press conference that the deposit run at SVB was “faster than the historical record would suggest.”

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

Similarly, Citigroup Inc. Chief Executive Officer Jane Fraser said in an interview with Carlyle Group Inc. co-founder David Rubenstein at an Economic Club of Washington event on Wednesday that "it’s a complete game changer from what we’ve seen before."

"There were a couple of tweets and then this thing went down much faster than has happened in history," she said.

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

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

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

“It’s a new world with very fast digital runs on the bank,” said Lex Sokolin, chief cryptoeconomics officer at ConsenSys.

Read More: Bitcoin Sinks Below $27K as Fed, Powell Keep Focus on Inflation

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

The images of customers waiting outside Silicon Valley Bank branches to speak to a teller might look quaint, if not ridiculous, were they not so tragic. As it turned out, the degens and tech-company treasurers, working from their computers, were first in line.

In the Internet era, it only takes a few clicks and a couple of seconds to transfer deposits from one bank account to another. When doubts arise that your money isn’t safe, just park it at a different online banking account.

Rumors – or even worrisome, confirmed facts – spread quickly on Twitter, politicians’ press releases or online news reports. When people decide to play it safe instead of sorry, 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 – especially regarding small- and medium-sized regional banks – remains fragile, as lots of uncertainty and concerns remain,” Nationwide Chief Economist Kathy Bostjancic wrote in a note previewing Wednesday’s Federal Open Market Committee meeting.

To 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, specifically stablecoins, aren’t a safe option for parking savings.

If the perception of stability is gone – think about all those Ionic columns holding up bank-branch facades – or if all money is now seen as hot online money – then the main advantage of the traditional banking system over crypto really amounts to the fact that it’s supported by the government with deposit insurance of lender-of-last resort borrowing facilities. The Federal Reserve’s founding in 1913, of course, was a direct response to the frequent bank runs of the late 19th and early 20th centuries.

On Tuesday, Treasury Secretary Janet Yellen said she is supportive of protecting depositors in smaller U.S. banks suffering deposit runs.

But on Wednesday, during testimony before the Senate Appropriations Committee in Washington, D.C., Yellen stressed that she is not considering a broad increase in deposit insurance. U.S. stocks slid on the news, because many traders had assumed that such a move was a fait accompli, maybe even a necessary one to prevent more deposits from fleeing smaller banks, or those perceived as weak.

Cryptocurrencies have been rallying since the start of what some people 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 might be a safe haven – say if the Fed needs to print more money to back 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’s having the intended effect of bolstering confidence in the banking system.”

With 2022's wounds still fresh, it's probably a stretch at this point to argue crypto is a safe haven, but it's not crazy to expect that perceptions of the banking system’s stability might now be due for a rethink 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, dedicated nearly a full page to describing how the government’s financial safety net had helped to address the banking panic of 1907, which culminated in a rescue from the financier J.P. Morgan.

“Fast forward 100 years, and digital-asset proponents are now aspiring to create a decentralized financial system without relying on governments and their regulatory frameworks,” according to the report. Crypto’s “proponents have been relearning the lessons from the previous financial crises the hard way.”

The messy and swift unwinding of several heavily supervised banks over the past month suggests that executives and regulators in traditional finance also have some relearning to do.

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

UPDATE (March 23, 2023, 14:45 UTC): Adds quote from Citigroup Inc. CEO Jane Fraser.