A new expression was born: the “digital bank run”. A crisis of confidence in the U.S. banking sector has led many depositors to withdraw their money from banks such as Silicon Valley Bank, Credit Suisse, and more recently First Republic Bank. A panic fueled by conversations on social networks which pave the way for an acceleration of withdrawal movements, says the new report from the Financial Stability Board of the G20 (FSB), published Tuesday.
From bank rush to bank sprint
Twitter posts containing negative information about Silicon Valley Bank (SVB) contributed to depositor withdrawals totaling $40 billion, or 23% of total deposits, within hours, leading to the bank’s bankruptcy on March 10, 2023. Michael Imerman, professor at the University of California, goes so far as to assert The Guardian that what happened to SVB was not “a bank run” but rather “a bank sprint”.
Likewise, Credit Suisse paid the price for this ultra-fast communication. Its shares fell 12% in a day after a journalist tweeted that a “major international investment bank” was on the brink of collapse. The tweet was then wrongly paraphrased by a media outlet who sent it to his thousands of followers. The rumor spread like wildfire on online forums and social media accounts, even though it was unfounded.
“Social media posts advised depositors to withdraw their funds from SVB, and many uninsured depositors did so in one fell swoop,” the report analyzes. The concentration of these large deposits by technology companies and individuals who appear to be part of closely intertwined virtual communities arguably contributed to the synchronized nature of deposit releases.”
Information not always reliable
The report thus takes up conclusions already formulated by five academics in a study published in June 2023. “Due to the strong networked nature of applicants concentrated in the technology start-up community, they often communicate on Twitter,” notes the analysis. The study even specifies that “the impact of negative sentiment is approximately ten times stronger if the tweets are written by a member of the “technological” start-up community or when the tweets contain words from the lexicon of contagion” .
Three reasons particularly distinguish this type of communication from more traditional word of mouth. The researchers note that “the speed of communication of social media is much faster than that of personal communications” and “information posted on Twitter (now “X”, editor’s note) is publicly visible, which conveys information much further. beyond close personal relationships. They also highlight the potentially misleading nature of the information.
New challenges for the banking sector
The US bank failures raise a number of questions which “deserve particular attention in the future work of the FSB”. Among them, for example, is the need to examine “how resolution authorities can better prepare for the increased speed of bank withdrawals due to, for example, 24/7 payments, services mobile banking and the use of social media.
To remedy this situation, the FSB report recommends, on this point, “considering that communications by the authorities and businesses of the country and the host country can contribute to restoring the confidence of the markets and depositors”.
In an article published on The conversation, Daniel Beunza, professor of social studies of finance at University of London, advises “obtaining opinions and information from a wide range of sources, both for professional investors and for people who trade with their own money”. Recommendations which cannot replace better risk prevention before the first withdrawals.