#486
Tipping Gasoline On A Good Ol’ Fashioned Bank Run
Published:
May 01, 2023
Author:
Cindy Grazer
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Hearsay has never been so dangerous as in the age of the Internet. Silicon Valley Bank experienced an unprecedented bank run on March 9 when customers withdrew $42b in a single day, leaving the bank with a negative $1b cash balance. While this action was made possible by digital banking capabilities to transfer balances in a few quick simple clicks, the rapid spread of information on social media exacerbated the situation.
House Financial Services Committee chair Patrick McHenry has called SVB’s crisis the world’s first “Twitter-fueled bank run.” A team of five American economists crunched through 5.4m Tweets since 2020, and concluded that social media directly led to the bank run, as bank share prices reflected Twitter sentiment on an hourly basis, and those banks that were most affected were the same ones with significant exposure to social media.
The inherent asymmetry of banking systems vs social media were exposed as part of this process: Twitter and banking systems operate 24/7, but the Fed’s discount window closes at 7pm ET. Additionally, combing through for accurate information can prove difficult to nearly impossible during high frenzy. A whole industry - known as online disinformation detectives, have emerged as a function of this phenomenon, hired by companies who want to protect themselves from social media manipulation.
The Fed is expected to release its own report on SVB on May 1 to address some of the issues inherent in the sequence leading into the bank’s collapse. Amongst them, the role of social media and other institutions’ exposure to the same types of actions should be center stage. Either way, it’ll likely tighten banking regulation, ICYMI (in case you missed it).
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Tipping Gasoline On A Good Ol’ Fashioned Bank Run
Twitter poses a risk to the financial system and helped fuel the SVB run, says first major study to investigate the topic - Professors from five different universities have released a study confirming that social media contributed to the run on Silicon Valley Bank, and they say other banks have similar risks. The researchers dissected roughly 5.4m tweets from the start of the year through March 14 about publicly traded banking stocks, finding that the risk of a bank run “increases markedly” when firms are repeatedly mentioned during “periods of intense Twitter conversation.” Read more
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