The social media boost to the Silicon Valley bank run sent shock waves throughout the US banking industry, according to a 53-page report released last week by a group of university professors.
In their study, Boffins used Twitter data to show that the SVB failure was preceded by a large spike of public communication on Twitter by apparent depositors, who used the platform to discuss the bank’s troubles and More importantly, their intention is to withdraw their deposits from SVB.
The openness and speed of this coordination around a bank run is unprecedented, the researchers said.
Mark T. Williams, master’s lecturer in finance at the Questrum School of Business at Boston University, explained that before the advent of social media, banks operated because individuals communicated through much slower communication methods, such as mail, phone, or word of mouth. . ,
He told TechNewsWorld, “The impact of influencer tweets on the speed and size of the SVB bank run demonstrates the speed in which social media has accelerated the speed and reach of communication.”
“SVB failed due to poor risk management and a crypto infection spreading throughout the industry,” he continued. “What Twitter did was hasten the process of failure.”
“When influencers can touch so many people so quickly, it’s dangerous,” he said. “They can move the stock price or the value and stability of the company.”
“But Twitter did not cause the failure of SVB,” he said. “SVB caused it. Twitter forced it.
Unique Risk Channel
The social-media-fueled run on SVBs has serious implications for the banking industry, according to researchers — J. Anthony Cookson, Corbin Fox of James Madison University, Javier Gil-Bajo of Université Pompeu Fabra, Juan F. Imbet,
The researchers noted that the Silicon Valley bank faced a novel channel of run risk unique to the social media era.
“SVB depositors who were active on social media played a central role in driving the bank,” the researchers wrote. “These depositors were concentrated and highly networked through the venture capital industry and founder networks on Twitter, exacerbating the risks of running another bank.”
More importantly, he continued, SVB is not the only bank facing this novel risk channel: open communication by depositors via social media has exposed the bank to other banks exposed to such discussions in social media. increased risk of driving.
“When information travels faster, people can run to the bank faster,” said Will Duffield, a policy analyst at the Cato Institute, a Washington, DC think tank.
However, trying to regulate that information is not a good solution to the problem, he said.
“You want efficient markets. You want people to share information about the health of different firms,” he told TechNewsWorld. “I can’t see the First Amendment tolerating regulation.”
social media passes
Duffield said social media platform operators are not in a position to solve the problem.
“I don’t think social media is a place to make such calls,” he said. “If you’re Twitter, you don’t know if a bank is solvent. You can’t see their balance sheet.
“You can suppress any claim that the bank is insolvent,” he continued, “but then you prevent a lot of people from knowing that the bank is in fact insolvent, and that they should try to get their money out of it.” Was.”
“When a rumor is doing the rounds, social media is in no position to verify its veracity,” he added.
Cookson agreed. “There’s not much that social media outlets can do,” he told TechNewsWorld.
“I don’t think of our paper as a call to action on social media because what users can post, or interruptions in communication, seem off limits, even when they are associated with significant real impacts,” he explained. .
“I don’t think it’s possible to regulate social media,” said Vincent Reynold, an assistant professor in the Department of Communication Studies at Emerson College in Boston.
“Any attempt to do so would be viewed as an attack on an individual’s right to express themselves,” he told TechNewsWorld.
Mark Ann Vena, president and principal analyst at SmartTech Research in San Jose, California, acknowledged that market vulnerabilities certainly exist when social media posts run amok and cause bank runs or even push stocks higher or lower.
However, he added that since social media posts are a form of communication, he doubts that “normal” posts can be regulated in a meaningful way to prevent these actions from occurring.
He told TechNewsWorld, “I could see that company executives and individuals who own shares in the stock could be prevented from posting insider-related posts, but existing laws and regulations already manage that, and those individuals are There are serious legal consequences for those who disclose insider information.”
“Where the danger for this really exists is if groups of individuals come together to create and promote posts that collectively have a stronger effect than if the individuals in the group posted themselves,” he said.
“If the information is intentionally misleading so as to create market distortion so that someone can take advantage, then there may be an opportunity for some regulatory work around that,” he added.
Absence of white-knuckling banking
Cookson notes that even in the absence of action by bank regulators to curb the accelerated effects of social media on bank runs, there is much that banks can do to keep their deposit runs short.
“Our results are that social media amplifies existing bank run risks, such as a larger percentage of uninsured deposits, so one key change we could see is that banks begin to manage their deposit risks more carefully. Because social media and digital banking make it risky to trust uninsured deposits,” he said.
Duffield said the Federal Reserve bailout procedures could be improved. For example, he pointed out that there is a 4 p.m. cut-off for transfers every day, even though the business operates in a world of real-time, global electronic transfers.
“The lenders of last resort in our system need to take a good look at how they can keep pace with the digital world,” he added. “These mechanisms may have worked fine in the 1970s and 1980s when everyone stopped trading at 4 p.m., but now everything moves much faster.”
“That’s a huge shortcoming that has been exposed by all this,” he said. “There’s just a mismatch in speed between the drawdown side and the pullout side.”
Another lesson learned from the SVB debacle is the difference between East Coast and West Coast banking cultures.
“West Coast capital culture is young,” Duffield said. “What we saw with Silicon Valley Bank was the downside of that. Trust developed over a very long time. ran for.