There’s plenty of blame to go around for the fatal run on Silicon Valley Bank. Fast-rising interest rates that pushed the value of the bank’s bonds underwater, bank management lapses and a lack of urgency among Federal Reserve supervisors have all been cited as causes.
But the megaphone Twitter gave the bank’s depositors, who were mostly venture capitalists and startup founders, to announce they were pulling their money out of the bank helped accelerate the bank run, according to college 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 clusters of words related to bank runs, including “withdraw,” “pull out” and “get out.”
“One core 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 troubling, 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 social media was a cause of the bank run.
“The combination of social media, a highly networked and concentrated depositor base, and technology may have fundamentally changed the speed of bank runs,” wrote Michael Barr, vice chair for supervision at the central bank, in the report. “Social media enabled depositors to instantly spread concerns about a bank run, and technology enabled immediate withdrawals of funding.”
The role of Twitter
Industry observers agree that social media platforms have exacerbated recent bank runs, but disagree as to how much.
“As much as social media has played a role in influencing politics and to an extent the outcome of an election, it will be foolish for us to think that the banking industry will be immune to it,” said Theo Lau, co-founder of Unconventional Ventures. “Social media algorithms, especially Twitter, are designed to amplify certain messages to get traction, and I do believe that it has contributed to the turmoil in recent bank failures.”
But the people creating the tweets also have accountability, Lau pointed out.
“Freedom to tweet and write comes with responsibilities,” she said. “Unfortunately, that’s not something that everyone abides by. There is no lack of clickbaits and messages designed to get attention. Everyone can create sensational stories and headlines with or without merit, and we’ve all become trigger happy. Social media can be used to unite for a good cause, and to divide as in the case with politics.”
Twitter’s purpose is to share information as quickly as possible, said Lincoln Parks, former vice president of innovation and strategy at Heritage Southeast Bank and current co-founder of digital marketing firm Lincoln James.
“So I can’t entirely place the blame on Twitter but on those that use the platform in ways that can be detrimental,” he said. “For example, when the first tweet was sent to ‘get your money out,’ if this person is a respected professional in the industry, people will, unfortunately, act before they think, and it’s the nature of influencers.”
The academic report could not draw a direct correlation between tweets and deposit outflows because banks only report their deposits quarterly, pointed out banking attorney Todd Phillips.
But it’s clear that tech founders and VCs who were Silicon Valley Bank customers moved in a herdlike manner 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 know,” he said.
Phillips sympathizes with 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.”
A risk for other banks?
Silicon Valley Bank was unusual in that it had a customer base intensely concentrated among startup founders and venture capitalists. Banks with more diverse customers should have less of an issue with Twitter-fueled bank runs.
“If you go to a community bank in Kansas City that has a lot of depositors that are farmers, they’re not going to be talking with each other all day every day because they’re going to be out doing their jobs,” Phillips said.
Still, the authors of the paper say other banks face similar risks.
To defend themselves, banks need to answer the claims being made on social media through one 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 firestorm situations,” Parks said. “I don’t think you can prevent this. You have to respond effectively on social media, use the channels to tell the bank’s story and protect its reputation with listening tools constantly scanning and listening for the bank’s name on all social media platforms.”