Tonother banking The turmoil that has engulfed a handful of U.S. and European banks in recent weeks has taken on a new character. The use of social media and messaging apps to spread information at lightning speed to growing groups of panic-stricken people marks a break with past crises. Meanwhile, new digital financial tools allow nervous savers to withdraw funds at the mere thought of the idea, whether from an office in San Francisco or a ski resort in St. Moritz.
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The idea of an accelerated bank run has understandably raised concerns among analysts and lawmakers following the collapse of Silicon Valley Bank. However, the wave of new technologies of the past decade is by no means the first to change behavior. The previous examples suggest a certain pattern: innovation initially helps boost prosperity based on a sense of future possibility, then accelerates and amplifies the eventual bust. History also shows that recent technological changes may have deeper effects and reshape markets in the long run.
Beginning in the 1840s, the United States was covered by the telegraph, which transmitted messages over overhead wires, linking the previously disparate financial markets of Boston, Chicago, New York, and Philadelphia. In 1866, reliable communication between America and Europe was also possible thanks to submarine telegraph cables. Historians argue that these new methods of conveying financial information eliminated pricing inefficiencies. For example, the gap between US and UK cotton prices has narrowed by a third, and volatility has also fallen. This new form of communication is significant enough to leave a legacy. Among currency traders, the GBP/USD rate is still informally known as “the cable”.
But efficiency often comes at a price. In the 19th century, cable communications were expensive and limited, and the information received risked being manipulated by the transmitter.During the Panic of 1873, reporters at economist There is a back and forth about whether the disruptive effects of new technologies, spreading fear from one market to another, outweigh the positives. A century later, new technology sparked renewed concern in the October 1987 market crash. The Brady Commission, which later looked into the U.S. recession, found that cross-border electronic communications exacerbated the problem. Traders and regulators believe they are in a country market that has been more isolated in the past. they are not.
Yet the impact of technological breakthroughs on banking crises is only one way they can change financial markets. John Handel, an economic historian at the University of Virginia, notes that in the financial world in the late 19th century, the increasing use of ticker tape—a more advanced form of telegraphic transmission of messages—enhanced monopoly the powers of its institutions. The London Stock Exchange and Exchange Telegraph, which is licensed to transmit data from the exchange, are beneficiaries. This helps to formalize the role of stock exchanges in global financial markets.
Historically, banks have benefited from high transaction costs and low financial literacy among customers, which combined to prevent savers from moving too much money into higher-yielding money market funds. Today, new communication technologies and digital finance mean that the investing public is more aware of alternatives to bank deposits and has more opportunities to invest in them. Recent research by academics at Columbia University, Peking University and Stanford University has shown that customers of Chinese banks with greater access to Yu’e Bao, an online investment platform that offers money market fund investments, withdraw more money. The new technology may have helped facilitate the nearly $300 billion influx into U.S. money market funds in March, further destabilizing banks.
Innovation has accelerated sudden market moves, reducing panics that took months in the 19th century to weeks. In modern times, timelines have been shortened even further, from weeks to days or even hours. However, this may be just one of the ways that frictionless transactions and free information of varying quality will affect finance in the years to come. Profits that banks have enjoyed for decades or centuries may also become harder to maintain due to high transaction costs and low financial literacy. ■
Learn more from our financial markets columnist Buttonwood:
Why Markets Can Never Be Truly Safe (March 23)
Why Commodities Shine in an Era of Stagflation (March 9)
Anti-ESG industries are attracting investors (March 2)
Plus: How the Buttonwood column got its name
