It Takes A Foundation Of Trust To Prevent SVB-Like Runs On Deposits

Silicon Valley Bank's fall was a classic example of how panic can take down even a sound bank if public confidence is lost

- Ajit Ranade

Silicon Valley Bank (SVB) was ranked among the top 20 by Forbes magazine in its 'America's 100 Best Banks' annual list published on 16 February. This ranking is based on the performance and credit quality of all large publicly-traded banks in the US. In less than three weeks of Forbes' grand anointment, SVB has crashed to zero value. This is the fragility of trust. A precious asset that a bank must have is intangible and not visible on its balance sheet. It resides in the minds of its depositors but can be destroyed by mere whispers.

SVB's implosion was a classic bank run. When all depositors rush to the bank to withdraw their savings, only the first few lucky ones can get out their full amount. The rest get a small amount insured by the US Federal Deposit Insurance Corporation (FDIC) and can potentially lose everything else. Fearing this, there is a stampede to be the first and beat others in the queue. What can cause such a stampede? Gossip, misinformation, rumours. It could be deliberate or organic. Just as there is no smoke without fire, rumours too often have a basis in something rotten in the bank's assets.