Study shows social media-fueled run on Silicon Valley Bank

According to a 53-page report released last week by a group of university professors, social media fueled the Silicon Valley Bank stampede, a stampede that sent shockwaves throughout the US banking industry.

In their study, the boffins used Twitter data to show that SVB’s failure was preceded by a significant spike in public communication on Twitter by apparent depositors who used the forum to discuss issues facing the bank. faced and, more importantly, of their intentions to withdraw their deposits with the SVB.

The openness and speed of this coordination around a bank run is unprecedented, the researchers argued.

Mark T. Williams, lecturer in finance at Boston University’s Questrom School of Business, explained that bank runs before the advent of social media occurred when individuals communicated through much slower methods of communication. , such as mail, telephone or word of mouth. .

“The effect of influencer tweets on the speed and size of the SVB bank run demonstrates how quickly social media has accelerated the speed and reach of communication,” he told TechNewsWorld.

“SVB failed due to poor risk management and crypto contagion that spread throughout the industry,” he continued. “What Twitter has done is hasten the process of failure.”

“When influencers can reach so many people so quickly, it’s dangerous,” he said. “They can change the price of a stock or the value and stability of a company.”

“But Twitter didn’t cause SVB to fail,” he added. “SVB caused it. Twitter accentuated it.

Single risk channel

The social media-fueled race on SVB has serious implications for the banking industry, researchers say – J. Anthony Cookson of the University of Colorado-Boulder, Corbin Fox of James Madison University, Javier Gil-Bazo of the Universitat Pompeu Fabra, Juan F. Imbet from Paris Dauphine University and Christoph Schiller from Arizona State University,

The researchers noted that Silicon Valley Bank faced a new race risk channel unique to the age of social media.

“Social media-active SVB depositors played a pivotal role in the bank run,” the researchers wrote. “These depositors were concentrated and heavily networked through the venture capital industry and founder networks on Twitter, amplifying other banking risks.”

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More importantly, they continued, SVB is not the only bank facing this new risk channel: open communication by depositors via social media has increased the risk of bank runs for other banks exposed to such discussions in social media.

“When information travels faster, people can run faster on a bank,” observed Will Duffield, a policy analyst at the Cato Institute, a Washington, DC think tank.

Trying to regulate this information, however, is not a good solution to the problem, he added.

“You want efficient markets. You want people to share health information from various companies,” he told TechNewsWorld. “I don’t see the First Amendment condoning regulation.”

Social media gets a pass

Social media platform operators are also not able to fix the problem, Duffield noted.

“I don’t think social media is capable of making those calls,” he said. “If you’re Twitter, you don’t know if a bank is solvent or not. You can’t look at their track record.

“You can remove any claims of bank insolvency,” he continued, “but then you could prevent a lot of people from learning that a bank is really insolvent, and they should have tried to get their money out of it. .”

“When a rumor circulates, social networks are not able to verify its veracity,” he added.

Cookson agreed. “Social media can’t do much,” he told TechNewsWorld.

“I don’t view our article as a call to action on the social media side, as any restrictions on what users can post, or interruptions in communication, seem off limits, even if related to real world effects. important,” he explained.

“I don’t think it’s possible to regulate social media,” added Vincent Raynauld, assistant professor in the Department of Communication Studies at Emerson College in Boston.

“Any attempt to do so will be considered an infringement on a person’s right to self-expression,” he told TechNewsWorld.

Dangerous groups

Mark N. Vena, president and principal analyst at SmartTech Research in San Jose, Calif., acknowledged that there are certainly market vulnerabilities when social media posts run amok and cause bank runs or even push stocks higher. up or down.

However, he argued that since social media posts are a form of communication, he doubted that “general” posts could be regulated in any meaningful way to prevent these actions from occurring.

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“I could see company officials and people who own shares in a stock being prohibited from posting insider posts, but current laws and regulations already handle that, and there are serious legal repercussions for people. who disclose inside information,” he told TechNewsWorld.

“Where the danger really exists is if groups of individuals come together to create and promote messages that collectively have a stronger impact than if the individuals in the group post messages themselves,” he said. he declares.

“If the information is deliberately misleading to distort the market so that someone can take advantage of it, there could be an opportunity to do some regulatory work around that,” he added.

Absence of White-Knuckling Banking

Cookson noted that even in the absence of action by banking regulators to curb the accelerating effects of social media on bank runs, banks can do a lot to make their deposits less leak-prone.

“Our finding is that social media amplifies existing banking risks, such as having a high percentage of uninsured deposits, so one big change we could see is that banks will start to manage their deposit risks with more care since social media and digital banking make it more risky to rely on uninsured deposits,” he said.

Duffield added that the Federal Reserve’s bailout processes could be improved. For example, he pointed out that there is a 16-hour limit on wire transfers every day, even though companies operate in a world of real-time global wire transfers.

“Lenders of last resort in our system need to think carefully about how they can move faster to keep pace with the digital world,” he said. “These mechanisms may have worked well in the 1970s and 1980s, when everyone stopped doing business at 4 p.m., but everything is going much faster now.”

“It’s a big gap that has been revealed by all of this,” he added. “There’s just a speed lag between the withdrawal side and the bridging loan side.”

Another lesson learned from the SVB debacle is the difference between East Coast and West Coast banking cultures.

“The culture of the West Coast capital is young,” Duffield said. “A lot of what we saw with Silicon Valley Bank was the downside of that. There’s not as much long-established trust. When it looked like things were going badly, everyone was running towards the exits instead of passing through.