FedFin Analysis: Possible Cures for a Viral Run

Among the most vexing issues in the wake of SVB’s failure is the extent to which social media may have led to the first “viral run,” a run akin to the meme-stock volatility that lead the SEC and others to fear a new form of “flash-crash” risk.  In this report, we assess current policy options related to deposit runs resulting from social media, an issue cited frequently by HFSC Chairman McHenry (R-NC) as a top priority as he begins work on post-SVB financial standards.  We note some remedies – e.g., a ban on deposit-related communication were they permissible under various constitutional and statutory free-speech edicts.  In this report, we thus assess tools more readily at hand that federal regulators might deploy now that social media’s destabilizing impact has been recognized, noting the challenges of forestalling runs without at the same time providing opinions on individual banking organizations or issuing preemptive systemic protections that would have the effect of eliminating deposit-insurance limits.  This report will thus also assess other options, including standards prohibiting deposit-related “exclusivity” requirements, dedicated Fed liquidity facilities, and revisions to the liquidity rules.  Options to revise FDIC coverage to address this risk through structural changes to coverage thresholds will be detailed in a forthcoming Petrou op-ed.