‘The First Twitter-Fueled Bank Run’: How Social Media Worsened SVB’s Collapse | Bank of Silicon Valley

Shares of banks around the world have fallen in recent days amid fears that the collapse of Bank of Silicon Valley (SVB) could precipitate a wider crisis in the sector.

The speed with which market jitters spread across the globe compelled bank executives and regulators to act with unprecedented speed: U.S. authorities guaranteed all deposits at SVB – and the smaller Signature bank – 48 hours after its collapse. A few hours later Credit Suisse share price plunged on Wednesdaythe Swiss central bank stepped in with a $54 billion loan.

While there’s nothing new about a financial emergency, these crises — and the resulting responses — are unique in that they were accelerated by a frenzy of social media chatter that fueled the panic.

“It was a banking sprint, not a banking run”

A bank run occurs when customers lose faith in an institution’s ability to manage their money and large numbers withdraw their deposits all at once. As more people withdraw their funds, the likelihood that the bank will be able to cover the withdrawals decreases, causing more customers to pile in and demand their money back.

“If you see a bomb expert running down the street, don’t ask him what happened, just try to keep up,” wrote Daniel Davies, managing director of Frontline Analysts, in the Financial Times.

Crowds gather outside the Brownsville branch of the Bank of the United States in New York after it was ordered to close and be taken over by the New York State Banking Department on December 11, 1930 . Photography: AP

Rumors about a bank’s creditworthiness can build up for months or years before escalating into a run. Or it can happen in a few hours.

The SVB collapse was the second largest bank failure in US history. The most important, Washington Mutual in 2008, took place over eight months. The collapse of SVB was played out in barely two days.

Anxious Twitter WhatsApp posts and exchanges, coupled with the ease of access offered by online banking, are seen by analysts as a serious catalyst for the current crisis. Experts suggest that in the age of social media, the psychological behavior behind a bank run – depositors’ massive fear of losing their savings – can be amplified and go viral faster than bank officers and regulators can respond. with success.

Michael Imerman, a professor at the Paul Merage School of Business at the University of California, Irvine, explains that what happened to SVB was “a banking sprint, not a banking run, and social media played a central role in that. regard”.

“You should be absolutely terrified right now”

What few SVB customers realized a week ago was how vulnerable their bank was. Like all banks, it had invested its customers’ deposits, with much of the money going into long-term US government bonds. The problem was that bonds have an inverse relationship with interest rates, so when the Federal Reserve began to rapidly raise rates to fight inflation, bonds held by the SVB began to lose significant value.

Many SVB customers were also affected by rising interest rates and had to access their deposits to meet daily business expenses. But with the value of their investments reduced, the bank struggled to meet the demands of its customers.

A decision to raise funds through the sale of shares proved to be the bank’s death knell. Venture capital firm Founders Fund reportedly told companies in its portfolio to withdraw their money from SVB. In the gossip-fueled world of Silicon Valley, this news has spread like wildfire. Customers withdrew $40 billion – a fifth of SVB’s deposits – in just a few hours.

Mark Tluszcz, CEO of Mangrove Capital, tweeted: “If you’re not advising your companies to cash out, you’re not doing your job as a board member or as a shareholder.”

Investor Bill Ackman tweeted that if federal regulators didn’t move quickly and guarantee all deposits, runs to other banks would begin on Monday.

Customers wait outside Silicon Valley Bank headquarters to withdraw funds after federal government intervention in bank collapse
Customers wait outside the SVB headquarters to withdraw funds. Photography: Anadolu Agency/Getty Images

“You should be absolutely terrified right now,” tweeted investor Jason Calacanis, using all capital letters for emphasis. “It’s the right reaction to a bank run and contagion.”

Other high-profile entrepreneurs sounded the alarm bells that went viral on social media, resonating strongly with the bank’s customers who tended to be tech-savvy entrepreneurs and very tuned into discussions. on line.

Congressman Patrick McHenry, chairman of the U.S. House Financial Services Committee, called the turmoil “the first bank run fueled by Twitter.”

Some messages that sent financial customers into a cold sweat have proven to be misleading, prompting calls to focus on facts, not speculation.

“The past few days represent a unique incident fueled by misinformation on social media and are not indicative of the health of our industry,” Lindsey Johnson, president of the Consumer Bankers Association, said in a statement.

The fear is spreading

SVB may be the first bank to be run in the age of social media, but it is not the first bank to have its core business rocked by feverish speculation on Twitter.

Early Thursday, Switzerland Credit Suisse announced it would take out a $53.7 billion loan of the Swiss central bank to consolidate its finances after its share price fell by 30%. The sale came after the bank’s largest shareholder, the Saudi National Bank (SNB), ruled out providing it with new funding due to restrictions limiting its stake.

However, the president of SNB said Swiss credit was “a very solid bank” and would probably not need more cash after a major restructuring plan last fall. A cap on the size of his stake was the reason for not investing more.

Credit Suisse’s problems are not new, the bank’s customers have weathered a series of scandals and stock market fluctuations over the past decade that have led to an exodus of customers, pulling their money out of the bank, contributing to losses that reached 7.3 billion Swiss francs in 2022.

But last October its shares fell 12% in one day after a reporter tweeted that a “major international investment bank” was on the brink. The tweet was later wrongly paraphrased by investing.com, which tweeted it to its thousands of followers. The rumor spread like wildfire on online forums and social media accounts but was, at least at the time, unsubstantiated.

Credit Suisse’s problems were then well-established and its share price had been falling for months, but experts pointed out that the tweet and its subsequent dissemination were very damaging to the bank.

Regulators, policymakers and bankers are now all compelled to examine the role social media may have played in the current upheaval – and what they can possibly do to stay ahead of the rumor mill. .

Associated Press and Agence France-Presse contributed to this report

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