In the middle of the American film “It’s a Wonderful Life” from 1946, the troubled hero George Bailey (played by James Stewart) faces a difficult challenge in the investment and loan bank he manages. The local customers arrive in droves, in what is known in financial jargon as a “run on the bank”, with the aim of withdrawing all their money, and he, for his part, with the help of his partner Mary (played by Donna Reed), tries to speak to their hearts and dissuade them from doing so, knowing that this act Will lead the family company to bankruptcy.
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Bailey, who shows up at the counter, honestly explains to the customers, whom he knows personally, that their money is not available in the safe, but it is in a safe place (“Your money is with her,” he says, pointing with one of the presences), and manages to convince them to accept even a small and partial amount. He dismisses one client from signing a document (“I know you and I know you will pay back”), and another client he gives a kiss for trusting him. And so, at one minute to six, the customers leave relatively calm, and the Baileys lock the doors and breathe a sigh of relief.
Prof. Uri Hefetz / Photo: Yossi Zamir
Uri Hefetz, a professor in the Department of Economics and the Center for Rationality at the Hebrew University and the School of Business Administration at Cornell University, uses the film to explain the trust on which the financial system is based throughout history, and the cracks that appear in it and may lead to collapse.
The Paris police restrains a run on the bank at the beginning of the last century / Photo: Shutterstock
“Everything becomes an off-the-shelf product – even the relationship with the banker”
“The film describes banks of the past,” says Prof. Hefetz. “He tells his customers at the counter – ‘Trust us. We were there when you needed us, be with us when we need you.’ This statement is cynically but accurately reminiscent of the request last week by Greg Becker, the outgoing CEO of Silicon Valley Bank, for investors to “calm down and support us as we have supported you in difficult times.” In Becker’s case, this request only increased the panic and the collapse.
“Banking, like many other things, has undergone commoditization and commodification (trading) over the years,” mentions Hefetz. “Everything becomes an off-the-shelf product, even the relationship with the banker, whereas in the distant past, the bankers were part of the community.” However, trust is still the basis of the whole process. “Right now we are in a tense atmosphere. This commodity, trust, is evaporating from the markets. Let’s hope that the process will stop soon. What started in Silicon Valley last week, reached Europe this week – to the Swiss banking system, to an institution with history and reputation – Credit Suisse – which in recent years has made bad decisions. My husband The deposits are leaving, and this week we saw a loss of trust from the shareholders as well. 160 years of history, but when trust is damaged, the fall can be very fast.”
Hefetz mentions that “the word credit, in English credit, is from the word Credere in Latin, which means: to believe. To trust. Financing begins and ends with trust. In the distant past, the banker knew the people, the family and the business. This is how he was able to assess who to give a loan and who not.
“However, even today, as then, there is a distinction between an illiquid bank and an insolvent bank. If it is insolvent, it means that its assets are lower than its liabilities, and then you have eaten it. Illiquid means that it has more assets than liabilities, but if all the borrowers want Now their money, he can’t give them. His financial situation is fine, he can meet all obligations, but not now for one second.
“There is no economic development without credit. It is breathing air in an economic system, even if today the app is my banker. No one saves money and then opens their first business only at the age of 60, or only then wants to buy the house. But my credit is your savings. Apparently, it is an unnatural act to take all your money and give it to the bank.”
In the film, as in the financial crises we have experienced over the years – including the great crisis of the 1930s, the dot.com crisis of the early 2000s, the subprime crisis of 2008 and the current crisis – there was a rumor that the banks were insolvent, and all depositors immediately requested The money.
Hefetz: “No one wants to be the last in line, because he is the one who may not receive. But it is clear that if everyone wants to be first, the bank will collapse and no one will receive, because no bank has money in the vault to pay everyone. It is not, and it should not be , the business model, which is normally based on the bank’s ability to give interest thanks to investments that are not liquid.”
Trust is essential, even if in a different version. “Who will I believe? The CEO who has never seen me? What do I even care? Let’s say I’m a start-up in Silicon Valley. It’s not the same game anymore.” However, trust is still necessary. And more than that – it is also about mutual trust. Ours in the banks and the banks in us.
In all the crises we have seen, is this a crisis of trust?
“Unequivocally yes, throughout history it’s always the same story. In good times, the money flows. In the current crisis, it was after a period when with every technological idea – screwed up, not screwed up – money flowed, money poured in, even knowing that only one of several entrepreneurs would succeed.
“In 2008 it was in the apartments and mortgages they took in the US with almost no equity. When there is money and interest rates are low, it is poured on what is in fashion. In the years before 2001 it was about ‘this new thing’: the internet. Before 1929 it was about radio technology. Before all the crises – the money flowed because we gave trust. In good times we are less careful. They say that when the tide is out, you see who swam naked, and as soon as the money runs out, you find out who made a bad bet – for example, on the interest rates.
Running on the bank in New York, 1912 / Photo: Shutterstock
“The insolvent players may indeed be a minority of the minority, but then everyone remembers that it can happen, loses confidence and wants to withdraw. In 2008 it was with the Lehman Brothers bank. At that second, the entire credit pipeline froze, because it was not known who was exposed to it, and to whom He owed money.
“Suddenly I don’t believe anyone. It’s a net loss of trust. As big as Lehman was, they were still only a small part of the financial system. Let’s say only one percent of the entire system is infected – you’d better be careful because you don’t know where the dangerous percent is.”
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One of the ways to calm the spirits, restore rationality to the system, and above all to stop the panic, we saw in the speed with which the American government reacted and announced that it would provide insurance for the losses of depositors, mainly the deposits in Silicon Valley.
“The solution also involves trust,” reminds Prof. Uri Hefetz. “At this point, the way to restore lost trust is through the liquidity that the state provides. In 2008, it was the taxpayer who actually returned the money. Today, at this point, it looks a little better, because Silicon Valley Bank has assets and 10-year bonds, it Just need mediation. We see that after every crisis, institutions are established to prevent what caused this type of crisis, but not necessarily prevent what will cause the next crisis.”
Extraction can also be harmful
Dr. Moran Ofir believes that this solution “provides a cure for Silicon Valley Bank customers, but not necessarily for the crisis of confidence. On the other hand, it gave an incentive to the customers of banks that had some kind of significant liquidity risk, to run to the bank and collapse it so that the government would bail them out as well. Therefore, this backing that the government gives stops the panic, but it is not necessarily a solution to the crisis of confidence. This is not an infinite backup.
“Throughout history we have seen such bailouts, but they increase inflation, and even if it will not be at the expense of the taxpayer, as they stated, it will be from the existing resources – education, health, infrastructure, and it always has a social cost.”
Ofir also refers to the fact that Silicon Valley Bank’s clients were very undiversified, while diversification and risk diversification can be a key to exiting the panic of the markets.
“Another piece of advice,” according to her, “is not to follow the tendency to exit when the market is low. This is against the most basic rule in economics. It is better to stay until the anger passes, certainly with long-term savings. Take a breath and give trust back.”
to see rather the excess of trust as the cause of the problem
Can the crisis of confidence be prevented before it erupts? After all, there are early signs, like talk of a bubble.
“Historically, when credit flows above average, the probability is that it will be followed by a recession. In financial crises, you suddenly remember what a crazy thing you are doing when you take all your savings and give to such an institution.”
Dr. Guy Hochman, head of the master’s program in behavioral economics at Reichman University, also recognizes the early signs, and therefore does not focus on the loss of trust as the cause of the unfolding crisis, and suggests focusing rather on the excess of trust. “The relationship is the opposite. It is not that there is a loss of trust and then a crisis comes. People think that prosperity and good economic times occur because of the government and the banks, which leads them to over-trust the systems, and take increased risk, and this eventually leads to a crisis followed by a loss of confidence.”
Dr. Guy Hochman / Photo: Gilad Kvalarchik
According to Hochman, we have a tendency called the basic attribution error, as a result of which we interpret reality as existing because of the personality characteristics of people in the space, and therefore during economic prosperity, most people will think that it is because of the qualities of the people in the system, which will lead them to more “risky” behaviors, which apparently can be A good thing, but also lead to a crisis.
“One of the classic examples is the subprime crisis in 2008. People were overconfident because of the great trust in banks and policymakers.”
And the banks had overconfidence in people.
“True. Today we know that every economic crisis was related to mistrust, but mistrust did not necessarily lead to a crisis. Beyond that, the idea of mistrust leads to negative emotions – fear and insecurity that affect economic behaviors. They stop taking risks that are indeed essential for economic prosperity , so not taking the risk can also damage the market and cause a crisis.
“Many times the actions of the people cause a crisis, because of the interpretation of them. What is happening now in Israel is a prophecy that is fulfilling itself because of the excessive mobility in the market.”
Dr. Moran Ophir, a senior lecturer and researcher of law and finance at Reichman University, focuses on the power of technology as a catalyst for crisis, but also on the basis – on human nature. Human nature is to trust. This is the basis for all economic models of pricing and investment.”
Dr. Moran Ofir / Photo: Sion Farage
According to her, the importance of trust is so great that the damage in a crisis is greater than its pure financial damage. “We see it in Silicon Valley Bank, where the insurance provided by the government returns all the deposits, and the damage still exists. Trust has been damaged, even though there probably won’t be anyone who will be damaged even by one dollar.”
Today you no longer need to run, but more trust is needed
In the movie It’s a Wonderful Life, which we opened, the hero turns to the customers, asks them to trust him, and even explains why. Dr. Ofir joins Prof. Hefetz, and emphasizes the power of technology in igniting the crisis. “The world today is different. There is almost no physical branch. It is enough to give online and theoretical instruction – everyone can do it in the same second. It is an accelerator of the phenomenon, which can also increase.
“When you have to make an effort to do something, sometimes there is less willingness, but when it’s such a quick action, it’s simpler. That’s why we saw a series of three banks that fall, if only because of the ease, speed and availability.”
Is there less trust in the system today?
“It requires more trust because it is digital. In the past the bank would only keep a safe with bills and the transfers were in secured trucks. Today there is often no physical transfer. On the other hand, as soon as there is a breach of the system, the crisis of trust will be greater.”
Does he also recover faster?
“Our nature is to restore trust, and history comes in waves, but it has a price and it takes quite a bit of time. There are estimates of costs from crises of trust. The major crises caused a direct increase of 13% of GDP and additional GDP losses of 20% of GDP.”