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Banking Instability in The Digital Age

By Shreya Agarwal


This article will explore how low levels of public confidence coupled with the recent advancements in digital technology has accelerated the pace of bank runs and subsequently, bank failures in major Western economies.To survey this phenomenon, the article will assess the major reasons shaping the current distrust, with the handling of the financial crisis of 2008 being the case in point. The article will argue that the banking systems in the market-driven Western economies need an overhauling of their regulatory mechanism to be better equipped to mitigate the risk of financial distress in the future.

Very recently, the world witnessed the failure of three major banks across the Western world. Within two weeks in March 2023, two banks in the United States, namely Silicon Valley and Signature Bank and Credit Suisse in Switzerland collapsed. The banks were facing trouble for quite some time in their inability to manage bond portfolios. Furthermore, they were exacerbated by changes in the internal managerial body of the banks. When this information became public via Twitter and other similar platforms, it was followed by a huge wave of consumer panic and withdrawal of a large number of deposits by consumers and businesses who had accounts in these banks, thus, leading the bank into a state of bankruptcy. Experts say that the Silicon Valley Bank failure was probably the first ‘social media fueled’ bank run of the digital age. How big the actual financial trouble was in the first place and whether consumers needed to fear whether their money was still safe or not is debatable. But what this recent event has signified is the huge impact of digital news and how it has the potential to dive into the consumer’s psyche to make impulsive decisions. 

                      Influence of Digital Technology on the banking system

Up until its failure, Silicon Valley Bank was the 16th largest bank in the United States and was known to lend to major tech start-ups, including big companies like Pinterest Inc and CrowdStrike Holdings Inc. In March 2023, the bank announced that it had sold $21 billion worth of securities to raise due to falling deposits. Within a span of a few hours, as this news spread online, panic-driven consumers withdrew deposits summing up to $40 billion, that is, one-fifth of the bank’s deposits. In what has been labelled as a “Lehman moment of technology”, by the next two days, as more and more withdrawals were made, the bank had to declare insolvency. Michael Imerman, a professor at the Paul Merage School of Business at the University of California-Irvine commented that, “It was a bank sprint, not a bank run, and social media played a central role in that.”

Thus, digital technology played a major role in engineering the bank’s crisis in two unprecedented ways. Firstly, in the ability of digital platforms to spread panic-driven news and secondly, by the swiftness with which consumers can make digital transactions. Such recent play of events highlights the role of third-party businesses (like news headlines on Twitter) in the growing integration between social media and the financial system. This is a fairly new and uncharted territory for policymakers and central banks. While the major financial regulators of the world have heavily scrutinized issues like house prices and the cost of credit, these recent digital advancements have added an additional layer of complication for the governments and policymakers to maintain public trust and stability of the banking system. 

                       Decreasing Level of Public Trust Post-2008 Crisis

In order to gauge a better understanding of how the current crisis spread out, it is pertinent to assess how the overall public distrust acted as an engine to aggravate the crisis. The financial crisis of 2008, especially the fall of the Lehman Brothers largely undermined the public trust on the overall stability of the financial system. There was a significant decrease in levels of public trust, from 39% to 30% after the crisis in the United States. Undoubtedly, the financial crisis put a huge strain on the government. The total direct cost of crisis-related bailouts on a fair value basis was about $498 billion, which amounted to 3.5 per cent of gross domestic product in 2009. It was a huge amount, and a significant chunk of it was shelled out from the taxpayers’ money.  

                    Bailouts and Accountability in context of bank failures

To further assess the implication of the crisis, it is necessary to understand what is a bailout and what forced the government to save so many banks from failing. A bailout refers to the prolonged financial support offered by the government or other financially stable organization to a business (here, the banks) in the form of equity, cash, or loan to help it overcome certain losses and stay afloat in the market. When banks started declaring insolvency one by one during the 2008 crisis, the Treasury Department of the United States stepped in to support the banks and to mitigate the effect from spreading further in the economy.

There was much negative discourse as to why did the Federal Bank save the banks when the core tenet of capitalism rests on the principle that markets should function freely so that the old and weak firms are weeded out naturally. But what the Republicans failed to acknowledge was that in the present world, due to economic convergence via global trade and the flow of funds through international capital markets, the interbank and inter-country dependence has increased tremendously. As economic entities and financial markets become increasingly intertwined, a shock in a financial network can provoke significant cascading failures throughout the global economic system.

Therefore, the recent announcement by President Biden that the government’s Treasury Department will provide financial aid to the Silicon Valley Bank came as a relief to customers and businesses who had their money locked up in the bank. It acted as a backstop for the other banks and financial markets in an effort to mitigate a spillover effect throughout the system. However, on a broader scale, just like the bail-outs of the 2008 crisis caused public distrust despite being beneficial, this time too, the public can be seen demanding more accountability from the government as to why the bank failed in the first place. The primary question remains unanswered. That was why it was required in the first place- why did the regulating bodies fail to prevent such a crisis from taking place?

The financial crisis of 2008 was fueled primarily because of the lack of proper government regulations on banks. LCFI’s ( Large and complex financial institutions) like Citigroup pursued aggressive growth strategies often involving risky investment decisions. When these failed investments led them to the brink of failure, they were saved by huge federal bailouts. Moreover, lack of a proper jurisdiction mechanism enabled most of the defaulters at Wall Street to go unpunished post the crisis. All of these questions reek of unaccountability on the part of the Central Bank policies and lead to more distrust in the system. Similarly, for the Silicon Valley Bank crisis, certain questions are still in the gray area that the policymakers are yet to address. Why did the government allow a bank to lend to so many new Venture Capitalist funded tech startups without a proper risk assessment? Moreover, the government had also recently announced that even uninsured bank deposits of the bank, including deposits above $250,000 will also be protected by the Fed, again, raising important questions over the impact of such a decision. 

     The conundrum between Government Regulations and Economic Growth

Again, this opens up the classical debate between free-market growth and stricter regulations. Those opposing stricter regulations argue that financial institutions in a free-market economy should be allowed to grow and diversify in order to capitalise on the opportunities that a liberalised-capitalist economy provides. Thus, it reasserts the old phrase, caveat emptor, that is, ‘let the buyer beware’. However, this statement undermines the power that consumers in the digital age hold. With a few clicks on their mobile phones, they can transfer huge amounts of currency money across banks. Moreover, the public perception of the stability of the overall financial system and of a particular individual bank are inextricably tied together. A single bank’s failure may undermine public confidence in the entire sector. And, at the same time, research also shows that the stability of the overall financial sector is significant for shaping positive perceptions for individual banks’ health. 


Digital technology has the potential to influence a mass number of consumers to make impulsive transactions playing into their fear. Thus, given how interconnected and dependent our economies and financial systems are, it is a warning call for policymakers to act on the growing influence of digital technology over the stability of the financial sector. Governments can no longer evade the looming question of more accountability that the public now demands. To put it succinctly, earlier, you could close a bank to prevent a bank run, but now, you cannot close the internet to prevent it. 

About the Author-

Shreya Agarwal is a first-year undergraduate student at Ashoka University pursuing a major in Economics. Her interests lie in economics, finance and public policy- and the intersection among these domains. 

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