Federel Reserve Governor Bowman in this speech on Bank runs higlights role of social media and variious communication mediums available today:
The speed and size of deposit withdrawals were a feature, not a cause, of the recent U.S. bank failures. We live in a world where a wide array of communication tools—text messaging, group chats, and social media postings—have enabled expedited, if not always more accurate, dissemination of information.
The spread of information has always played an important role in bank confidence and bank runs. When information is more readily and quickly accessible and shared among shareholders, creditors, customers, and depositors, bank management needs to be attuned to how it communicates, especially when remediating identified weaknesses.
The failure of SVB illustrates this dynamic. Uninsured depositors were connected by a closely linked network of business relationships and contacts, and strong ties with venture capital fund investors. The flow of information among these depositors—and the mechanisms that pushed them to act collectively—seem apparent in retrospect, but the closely linked relationships among this group exacerbated the risks involved in SVB’s public communication of its remediation strategy.
But while the risk of uninsured depositors acting collectively was a significant vulnerability, communications from management caused this group to begin to withdraw their deposits on a massive scale and in a coordinated fashion. We know that there were many supervisory issues at SVB over several years. At the time the bank failed, it had been selling securities to improve liquidity and raising capital to address some of these fundamental weaknesses in its funding and liquidity. Simply the act of announcing that the bank’s management was taking steps to remediate these issues created panic—highlighting the risks they were confronting—and the panic spread quickly.
Social media has also played a role in fueling stock price volatility, which can lead to other risks to a bank. In October of last year, rumors circulated about Credit Suisse’s stock price conflating stock price with capital and liquidity strength. Despite Credit Suisse management’s efforts to intervene and calm markets, its stock experienced significant volatility, resulting in an increase in the spreads on the firm’s credit default swaps and a decrease in the value of its bonds. Credit Suisse had been dealing with significant issues for an extended period of time, but this incident highlighted how quickly investor sentiment can change in the age of social media.
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