The impact of social media and digital banking on financial crises like Silicon Valley Bank’s collapse should not be overlooked, according to a financial memo published yesterday (April 17) by Howard Marks, co-founder of distressed debt investor Oaktree Capital Management.
The fast-paced nature of digital communication and banking platforms contributed to rapid withdrawals and the bank’s failure, which Marks says was likely an isolated incident not indicative of widespread issues in the U.S. banking system.
SVB had a significant amount of its investments in treasury bonds and long-term debts. As the Federal Reserve raised interest rates, however, the value of these bonds decreased in value and SVB clients began withdrawing their assets in mass, with the bank collapsing in March in a matter of a few days.
The bank’s region of Northern California and its concentration on venture capital-backed startups were two highly volatile sectors, said Marks, adding that in part because SVB’s clients had so much capital and little need to borrow, the bank invested in bonds as it had few traditional uses for its assets.
Before the widespread use of social media, depositors wouldn’t have become aware of banking issues as quickly and would have needed to visit branches during banking hours to submit withdrawals, said Marks. “In SVB’s case, word of the bond losses traveled quickly, through unusually interconnected depositors who had the ability to request withdrawals online.”
Marks is worried about commercial real estate
Rumors of SBV’s losses spread rapidly amongst its customers, many of whom lived and worked near each other, causing one-third of the bank’s deposits to be withdrawn in a single day, he said. “All banks have to contend with digital communication and online withdrawals these days, but SVB’s depositors were particularly high flight risks, given the bank’s region and the nature of its clientele.”
Marks, who has a net worth of $2.2 billion, according to Forbes, also warned that banks should keep a close eye on the commercial real estate sector, which he described as “one of the biggest worries they face today.”
Higher interest rates, the possibility of a recession and the threat of remote work to office buildings have created growing concern in the real estate industry. Banks are the largest real estate lenders and hold an estimated 40 percent of outstanding commercial real estate mortgages, said Marks, adding that these mortgages will see notable defaults in light of the industry’s instability.
“No one knows whether banks will suffer losses on their commercial real estate loans, or what the magnitude will be,” he said. “But we’re very likely to see mortgage defaults in the headlines, and at a minimum, this may spook lenders, throw sand into the gears of financing and refinancing processes, and further contribute to a sense of heightened risk.”
