What banks can learn from new research about social media-fueled bank runs — and why what banks do best may just be their secret weapon.
By Craig ColganModels developed decades ago show that communication and coordination are key bank run risk factors. Now, what researchers are learning about social media’s role in not only the largest but fastest bank run in the country’s history shows that managing these risks will not be simple.
The simple part: Recent research makes the case that social media in fact did contribute to the run on Silicon Valley Bank. The not-so-simple part: At the moment that SVB was itself the topic of an intense social media frenzy, researchers found that other banks also suffered negative effects, such as wobbling stock prices. “The speed at which Silicon Valley Bank collapsed has left experts questioning whether social media has opened up entirely new risks in the world of finance,” reported the Guardian.
But what banks are best at may just be their secret weapon.
When social media comes for one bank, other banks are vulnerable
A working paper by five researchers from American and French universities titled “Social Media as a Bank Run Catalyst” reveals how social media turmoil that began among SVB depositors and then quickly expanded also affected banks that did not share the distinctive business model of SVB. This group of banks, however, did share with SVB some similar basic vulnerabilities and were the topic of social media conversation weeks before the SVB run.
The researchers grouped U.S. banks by the number of tweets posted about them and by their vulnerability to a potential bank run. To measure vulnerability, they multiplied losses the banks incurred due to recent interest rate increases by the proportion of their deposits that were below the FDIC’s insurance limit of $250,000. They found that shares of banks seeing increased Twitter discussion in January and February incurred much larger declines in March. This effect was stronger for the group of banks with the most vulnerability. One of them was First Republic Bank, which failed on May 1. When researchers looked at what happened to the stocks of all the banks with vulnerable balance sheets from March 6 to 13, “the one-third of banks with the most tweets experienced declines in their share prices on average about twice as large as the others,” the researchers explained.
The specific characteristics of SVB’s business, operation and other vulnerabilities and factors certainly placed it in harm’s way. Some initial post-run analysis considered whether regulators themselves could have known about building danger if they paid more attention to social media.
However, “there is no mechanism at this time whereby bank regulators can monitor trends on social media to get ahead of any rumors, valid or unsubstantiated,” says Michael Imerman, assistant professor at the Paul Merage School of Business at the University of California, Irvine. “We have the technology at our disposal: machine learning, big data analytics, natural language processing, sentiment and tonal analysis. Fintech companies use these technologies as part of their primary business models.” And there is precedent for financial regulators using these tools in various types of surveillance and monitoring, Imerman points out.
“In the capital markets space, however, the SEC does monitor social media to look for insider trading, market manipulation and other harmful activities,” he adds. “Think the meme stock craze last year. There is no reason, in my opinion, why bank regulators should not be using these technologies to monitor social media in real time to identify negative sentiment trends and at least start investigating and working with potential problem banks before it becomes too late.”
What banks do best
Providers of such solutions assist banks in understanding how their brands not only may avoid social media trouble but accomplish the thing that banks do best: build relationships.
“Banking is a relationship business, foremost,” says Doug Wilber, CEO of Denim Social, a social media firm that works with financial institutions. “Your people own the relationships. They need to be empowered to nurture those relationships on social media based on a foundation of trust. If you aren’t doing it now, today is the day to start.” In the event of any crisis, existential or otherwise, banks that will have better outcomes will be those that have quick, consistent responses that not only come from the top, but are amplified by its associates, “especially wealth managers, commercial bankers, loan officers, etc.”—who should be empowered to form meaningful bonds with their communities before crises, Wilber adds.
“When the going gets tough, those relationships matter,” he says. “Even if they’ve been built online, in times of crisis, associates can take conversations offline to reassure clients one-on-one. But banks have to invest in building the relationship capital now.”
The SVB social media analysis revealed the effects of “contagion keywords,” as well as that of tweets by specific depositors or others who may turn out to be influencers. In the case of SVB, that group included members of the tech startup community. While many of these players participated in public conversations about SVB’s condition on Twitter, which at the time allowed easy API access to research tools, conversations on more private social and chat platforms—from WhatsApp to Slack to Discord—will necessarily be difficult for researchers to analyze.
Initial post-mortems from regulators on the SVB failure offered no substantial social media insights or recommendations to banks. “No matter how strong capital and liquidity supervision are, if a bank has an overwhelming run that’s spurred by social media, or whatever, so that it’s seeing deposits flee at that pace, the bank can be put in danger of failing,” noted Secretary of the Treasury Janet Yellen.
A Government Accountability Office report noted that supervisors failed to escalate their concerns about the banks’ management of risk related to deposits in the months preceding the failures. If regulators monitored social media formally, would they be more aware of pending problems, such that useful assistance could be undertaken earlier?
“The reality is that a negative comment, especially as disastrous as was experienced in Silicon Valley Bank’s case, was a lagging indicator,” says Ben Pankonin, founder of Social Assurance, a social media firm. This does not mean that monitoring by banks themselves of social media is inconsequential, he adds. “What it does mean is that monitoring for one negative post is not as important as creating a sustaining brand that is listening to customers and projects timely and relevant communication on an ongoing basis.” (Pankonin will expand on these issues in his session at the ABA Bank Marketing Conference in Austin, Texas, Sept. 27-29.)
Social media operation as risk management
When social media chatter starts up, it’s not just the bank in the bullseye of Trending Topics that’s at risk. Social media activity even before moments of crisis matters too, and always has. While social media’s impact on inflaming a bank run is the topic of new academic inquiries, to what extent does this work and all the post-SVB analysis inform banks about other obviously more common social media threats?
More research is needed, says Imerman. “We can quantify risks associated with market factor movements, credit defaults and more,” he says. “Social media risk, and its implication for liquidity, market movements and even loan losses, I think could potentially be new areas of research in the next few years.”
Ongoing research investigates the use of various technologies to improve customers’ real-time information on the liquidity conditions of their banks. Emergent technology is aimed at providing real-time and more transparent information to reduce the effects of social media-fueled rumors and of panicked depositors, or at least provide more time for banks to address concerns and attempt to quell panic, notes Merav Ozairat, a data scientist and consultant.
Elevating social media as part of the portfolio of formal risk management operations is one option for banks. Should banks move the social media team down the hall to the risk offices? How should these traditionally separate entities collaborate?
“Structurally, where the social media team sits is less important than a strong collaboration between the social media team and risk functions,” says Renee Huffaker, CRCM, chief compliance officer for Arvest Bank, based in Bentonville, Arkansas. “Make sure your social media team understands when to escalate issues and has a clear, direct path to do so.”
Social media threats to banks are morphing quickly. The social media scrum around SVB was based at least on the reality of that bank’s crisis itself. Huffaker is tracking organized cyberbullying, where members of online social communities attack bank brands with negative comments “that may not be tied to any specific fact,” she says. “Often, cyberbullying is small and isolated. It generally fades away without response from the company. But we’ve seen some major brands subjected to broad, organized social attacks in recent months. Banks need to have a plan in place for this type of potential activity, too.”