Digital bank runs are the new threat to financial stability that keeps regulators and investors awake at night, says this finance professor.
Unlike traditional bank runs, which conjure up images of people queuing outside a branch to withdraw their money in person, digital bank runs snowball even faster due to social media chatter. This can add to the sense of panic around the run.
Banks only keep a fraction of the money entrusted to them, investing the rest for profit. This means if a sufficiently large number of depositors demand their money back - typically out of fear about failure - the bank will not have enough. And then it really will fail. Concerns about a single bank may spread to other banks, leading to panic about the industry, widespread bank failures, and eventually, economic recession.
The failure of Credit Suisse was arguably kicked off by an ill-thought-out comment by the chair of a major investor in the bank, Ammar Al Khudairy of Saudi National Bank. He did not comment publicly on this issue but resigned within two weeks “due to personal reasons” according to a statement to the Saudi stock exchange.
So getting opinions and information from a wide range of sources is key both for professional investors and for people trading with their own money.In my own research, I have often encountered this loss in translation, but professionals also have ways to communicate with each other and clarify such ambiguities. During fieldwork at a Wall Street trading floor, I saw traders making inferences about potential investments from price movements.
They then executed the trade. Such strategies helped this bank attain a combination of risk and returns that was well above its Wall Street peers.
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