The Silicon Valley Bank crisis showed how the perils of fractional banking can be compounded by social media. Barring extreme situations such as queues of customers outside bank branches, it was difficult for negative information to spread from one customer to the next before social media.
But as a new, non-peer reviewed research paper suggests, a rise in negative tweets about Silicon Valley Bank before its Mar 10 collapse was followed by a drop in its stock price, seen as a proxy for deposits. The authors conclude that “social media did, indeed, contribute to the run on Silicon Valley Bank”.
AVOIDING A BANK RUN
To avoid the kind of contagion that leads to digital bank runs, bank management, investors and regulators need to be careful about what they say. Even if they aren’t posting on social media, investors and other interested parties are, and their discussions can impact sentiment about a bank.
The failure of Credit Suisse was arguably kicked off by an ill-thought-out comment by the chair of a major investor in the bank, Ammar Al Khudairy of Saudi National Bank. He did not comment publicly on this issue but resigned within two weeks “due to personal reasons” according to a statement to the Saudi stock exchange.
Communication – or a lack of it – was also associated with the more recent share price drop and loss of confidence in First Republic Bank. A management decision not to take questions after a critical presentation to investors on Apr 25 attracted media attention before the banks assets were seized by US regulators and sold to US banking giant JP Morgan on May 1.
Governments can also help prevent digital bank runs. Deutsche Bank experienced a sharp drop in its share price on Apr 24, minutes after the cost of insuring its debt against default surged to a four-year high. But a run on Deutsche did not happen. Germany’s chancellor Olaf Scholz publicly dismissed any comparison between Deutsche and the failed Swiss bank, which seemed to reassure markets.
