New Research Shows Social Media Contributed to Bank Failure

Report finds social platforms can impact banking stability, a trend authors call “potentially troubling.”

Social media directly contributed to the failure of Silicon Valley Bank, according to new research that warns other financial institutions may be at risk as well.

“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 researchers found. “The openness and speed of this coordination around a bank run is unprecedented.”

The authors of the paper, titled Social Media as a Bank Run Catalyst, are J. Anthony Cookson of the University of Colorado at Boulder, Corbin Fox of James Madison University, Javier Gil-Bazo of Universitat Pompeu Fabra, Juan F. Imbet of Université Paris Dauphine and Christoph Schiller of Arizona State University.

What Exactly Did the Report Find?

The researchers used comprehensive Twitter data to show that exposure to social media predicted stock prices during the run period.

Credit unions, of course, do not issue stock the way that banks do. And the authors do not discuss credit unions. However, the report makes it clear that social media can be used to convey other rumors leading to bank runs.

“The implication that social media matters for banking stability is potentially troubling because social platforms can spread inaccurate information, which could serve as a sunspot that leads to bank runs,” they wrote.

The problem was magnified at Silicon Valley Bank, since many of the institution’s customers were members of the “startup community,” who used social media a great deal.

“These depositors were concentrated and highly networked through the venture capital industry and founder networks on Twitter, amplifying other bank run risks,” they wrote. “More importantly, SVB is not the only bank to face this novel risk channel: Open communication by depositors via social media increased the bank run risk for other banks that were ex ante exposed to such discussions in social media.”

What Comes Next?

Federal regulators and members of Congress have said that they believe social media played a role in Silicon Valley’s failure, but also have conceded they are not sure what to do about the problems social media poses.

Rep. Ritchie Torres, D-N.Y., a member of the House Financial Services Committee, has introduced legislation that would require the Financial Stability Oversight Council to monitor social media platforms for indications that there may be financial panic or a bank run. The bill, H.R. 2396, also would require FSOC to conduct a study to determine if social media platforms affect financial panic.

That legislation has not yet been considered by the Financial Services Committee.