There is plenty of blame to go around for the fatal run on Silicon Valley Bank. Rapidly rising interest rates that plunged the value of the bank’s bonds, failing bank management and a lack of urgency among Federal Reserve supervisors have been cited as causes.
But megaphone that Twitter gave to bank depositorswho were mostly venture capitalists and start-up founders, announcing that they were pulling their money out of the bank helped accelerate the run on the bank, according to university professors who analyzed tweets posted about banks in mid-March.
The authors of the paper“Social Media as a Bank Run Catalyst,” analyzed more than five million tweets posted about a small number of banks in mid-March, looking for groups of words related to bank runs, including “withdraw,” “withdraw” and ” go out.”
“A central insight is that SVB faced a novel channel of bank run risk that is unique to the social media era,” the researchers wrote. “SVB depositors active on social media played a central role in the bank run.”
The findings are worrisome, the academics say, because some social media posts are inaccurate, so misinformation could lead to bank runs.
The Federal Reserve’s report last week reviewing its own supervision and regulation of Silicon Valley Bank also said that social media was the cause of the bank run.
“The combination of social media, a highly interconnected and concentrated depositor base, and technology may have fundamentally changed the speed of bank runs,” Michael Barr, the central bank’s vice president for supervision, wrote in the report. “Social media allowed depositors to instantly broadcast concerns about a run on the bank, and technology enabled immediate withdrawals of funds.”
Industry observers agree that social media platforms have exacerbated recent bank runs, but disagree on how much.
“As much as social media has played a role in influencing politics and, to some extent, the outcome of an election, we would be foolish to think that the banking industry will be immune,” said Theo Lau, co-founder of Nonprofit Entrepreneurship. conventional. “Social media algorithms, especially Twitter, are designed to amplify certain messages to get traction, and I think that has contributed to the turmoil in recent bank failures.”
But the people who create the tweets also have a responsibility, Lau said.
“The freedom to tweet and write comes with responsibilities,” he said. “Unfortunately, that’s not something everyone abides by. There’s no shortage of clickbaits and messages designed to get attention. Everyone can create sensational stories and headlines with or without merit, and we’ve all become happy. Social media can be used to unite for a good cause, and divide as in the case of politics”.
Twitter’s purpose is to share information as quickly as possible, said Lincoln Parks, former vice president of innovation and strategy at Heritage Southwest Bank and current co-founder of digital marketing firm Lincoln James.
“So I can’t blame Twitter entirely, but rather those who use the platform in ways that can be harmful,” he said. “For example, when the first ‘get your money’ tweet is sent, if this person is a respected professional in the industry, unfortunately, people will act before they think, and that’s the nature of influencers.”
The academic report was unable to establish a direct correlation between tweets and deposit outflows because banks only report deposits on a quarterly basis, bank attorney Todd Phillips said.
But it’s clear that the tech founders and venture capitalists who were Silicon Valley Bank clients moved like a herd because they were all getting information from the same places, he said.
“Whether those places were Twitter, their private WhatsApp channels or Slack channels, I don’t think the public can really tell,” he said.
Phillips sympathizes with the depositors who contributed to the run.
“If everyone had stayed together, the bank would have been better off,” Phillips said. “But do I want to risk trusting other people when it could possibly put my business at risk? It’s very much a prisoner’s dilemma. And when my business is on the line, I understand why people ran away.”
A risk for other banks?
Silicon Valley Bank was unusual in that it had a client base intensely concentrated among startup founders and venture capitalists. Banks with more diverse customers should have less trouble with Twitter-driven bank runs.
“If you go to a community bank in Kansas City that has a lot of depositors who are farmers, they’re not going to be talking to each other all day every day because they’re going to be out doing their job,” Phillips said.
Still, the article’s authors say other banks face similar risks.
To fight back, banks need to respond to claims made on social media through a corporate voice, Parks said.
“Banks need to invest more in social media training to help executives, middle managers and employees learn how to handle these types of stormy situations,” Parks said. “I don’t think you can avoid this. You need to respond effectively on social media, use the channels to tell the bank’s story, and protect your reputation with listening tools that constantly scan and listen for the bank’s name across all media platforms. social”.