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

A Silicon Valley Bank office is seen in Tempe, Arizona, on March 14, 2023.

Rebecca Noble | AFP | Getty Images

The panic-induced customer withdrawals that imploded Silicon Valley Bank and Signature Bank — and sent shock waves through financial markets and the broader banking system — offer an acute lesson in human psychology.

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

“Psychology injects a lot of extra risk into the world,” said Harold Shefrin, a behavioral finance expert and finance professor at Santa Clara University. “And we experienced that risk last week — from Silicon Valley Bank and the reactions on the part of its depositors.”

Customer fear became a self-fulfilling prophecy

Our brains are hard-wired for a bank run.

Humans evolved as social creatures that thrive in groups, said Dan Egan, vice president of behavioral finance and investing at Betterment. As such, we care a lot about what others think and do.

Read more of CNBC’s coverage of the bank crisis

Why the bank run on SVB seemed ‘rational’ for some

There are firewalls against this kind of behavior. The Federal Deposit Insurance Corp., or FDIC, backstops bank customers’ savings up to $250,000.

This insurance program was created in 1933. At that time, widespread hysteria during the Great Depression had toppled thousands of banks in rapid succession.

FDIC insurance aims to instill confidence that the government will make customers whole — up to $250,000 per depositor, per bank, per ownership category — if their bank fails.

“Prior to the establishment of the FDIC, large-scale cash demands of fearful depositors were often the fatal blow to banks that otherwise might have survived,” according to a chronicle of the agency’s history.

SVB’s customer base included many businesses like technology startups with a high degree of uninsured deposits (i.e., those exceeding $250,000). As of December, about 95% of the bank’s deposits were uninsured, according to SEC filings.

Charles Schwab CEO on SVB fallout, contagion risk and deposits

Its failure illustrates a few principles of behavioral finance.

One is “information asymmetry,” a concept popularized by economist and Nobel Laureate George Akerlof, Shefrin said. Akerlof, the husband of Treasury Secretary Janet Yellen, analyzed how markets can break down 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 asymmetry applies across many markets and was a source of Silicon Valley Bank’s collapse, Shefrin said.

The bank said March 8 that it was selling $21 billion of securities at a loss and trying to raise money. That announcement triggered a panic, amplified by social media. Customers saw peers rushing for the exits and didn’t have the time (or perhaps acumen) to pore over the bank’s financial statements and judge whether the bank was in dire straits, Shefrin said.

Rational market theory predicts that customers with uninsured…

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

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