Report Summary: Social Media as a Bank Run Catalyst

Recommendation

In March 2023, Silicon Valley Bank succumbed as its depositors fled, with these and other stakeholders signaling the bank’s perceived financial troubles through social media. The momentum was so swift and powerful that bank executives could not forestall the financial implosion. In a thoroughly researched and well-structured analysis, a group of academics explains how Twitter users created a cascading effect that turned into an unprecedented bank run. The professors also show how social media could put other financial institutions at risk. Investors, bankers and policy officials will find this a robust examination of the entanglement of bank failure and social media.

Take-Aways

• Silicon Valley Bank (SVB) shuttered after depositors withdrew large sums from the institution and the bank was unable to meet its obligations.
• Investors and depositors on social media generated a torrent of messages that accelerated SVB’s demise.
• The banking system could be at risk for contagion when social media users speculate about the health of an institution.

Summary

Silicon Valley Bank (SVB) shuttered after depositors withdrew large sums from the institution and the bank was unable to meet its obligations.

Silicon Valley Bank, one of the United States’ largest financial institutions, came under considerable financial pressure in March 2023. Depositors, many of whom held balances in excess of Federal Deposit Insurance Corporation limits, led a ferocious exodus of money from the bank.

“The failure of SVB was preceded by a large spike of public communication on Twitter by apparent depositors in SVB who used the forum to discuss the trouble the bank was facing, and more importantly, their intentions to withdraw their deposits from SVB.”

The bank run emanated from these depositors posting about potential SVB weaknesses on Twitter. These stakeholders were well-connected within Silicon Valley’s venture capital and founder networks on the social media platform.

Investors and depositors on social media generated a torrent of messages that accelerated SVB’s demise.

Social media’s role in the fall of SVB is rooted in the sphere of uninsured deposits; specifically, in investors’ perception of the number of depositors likely to withdraw their holdings. The more that depositors with uninsured deposits engaged on social media, the higher the probability of spillover effects and bank-run risk.

“One core insight is that SVB faced a novel channel of bank-run risk that is unique to the social media era. ”

During the run period from March 1 to March 14, 2023, SVB, along with a handful of other financial institutions, experienced a 6% greater drop in stock prices than did their peers with less social media exposure. Higher levels of Twitter chatter also correlated to greater mark-to-market losses for these banks.

“Both the interaction between uninsured deposits and Twitter conversation intensity and the triple interaction between mark-to-market losses, uninsured deposits and Twitter conversation intensity significantly predict larger bank stock losses during the run period.”

From March 8 to March 13, some 6,528 Twitter posts mentioned the word “run,” while “banking contagion” was found in 9,662 entries. In addition to these tweets, investors holding or following SVB’s stock communicated about the underlying risk to the shares, which then fed into the larger Tweet dynamic of a bank run. The depositors and investors who led the momentous withdrawal pressure via Twitter were a tight-knit network that exacerbated the run on SVB.

The banking system could be at risk for contagion when social media users speculate about the health of an institution.

In the final analysis, a confluence of factors led to SVB’s collapse, including an excess of nominally uninsured deposits, a client base of professionally connected individuals and companies, and a Twitter barrage that accelerated the withdrawal of funds.

“The amplification of bank run risk via Twitter conversations is a unique opportunity to observe communication and coordination that shapes a critically important economic outcome − distress in banks.”

Social media’s role in the SVB collapse demonstrates how the speed of information dissemination poses substantial risks to the financial system. In particular, vulnerable financial institutions under duress could face similar risks.

About the Authors

J. Anthony Cookson et al. are finance professors at the University of Colorado, Boulder; James Madison University; Universitat Pompeu Fabra and Barcelona School of Economics; Université Paris Dauphine; and Arizona State University.