The collapse of Silicon Valley Bank almost a year ago demonstrated the damaging consequences of an old-fashioned bank run when combined with the latest digital technology.
The California-based bank entered last March with $220 billion in assets and a liquidity plan designed to accommodate withdrawals of up to $16 billion in a single day. There was a time when a bank was doing pretty well if it had access to funding equal to 7.2 percent of its assets to cover withdrawals on short notice. But, of course, that plan proved woefully inadequate when on March 9, 2023, customers tried to withdraw $42 billion in an eight-hour period. SVB’s digital banking tools apparently gave customers the ability to move money almost instantly, while the bank itself needed significantly more time to come up with the funds to cover those withdrawals.
What a dramatic reminder of the importance of thorough liquidity planning. With deposits on a general decline at most community banks, it is imperative that banks know where to turn should withdrawals spike. In today’s world, the most insignificant news tidbit can be blown up by social media to cause otherwise clear-thinking customers to move their money in a panic. Pre-internet, there might have been time for a banker to turn the tide by reassuring key customers, but not today. Banks need ready access to funding sources to handle these kinds of worst-case scenarios.
The Bank Term Funding Program has been a useful option since SVB failed, but the Federal Reserve plans to end it on March 11. Nonetheless, the Fed remains our banking system’s lender of last resort, and that safety net has never been more important, given the new realities of digital banking. More should be done to remove the traditional stigma that has sometimes accompanied Discount Window borrowing.
The Federal Home Loan Bank system has been an important source of liquidity, and it is advocating for internal changes to keep the 100-year-old system relevant to the needs of modern banks and their customers. Easier access to FHLB funds has got to be one of its goals.
Senior leadership at all banks should look at their liquidity plans more closely than ever. Consult your correspondent bankers, investment advisors and other trusted partners to identify funding sources; set up the accounts and paperwork now so that when you need them, your funding sources are available in an instant — because in today’s digital world, that’s how quickly a run on deposits can devastate a bank.