Social Media Panic Triggers Banking Risk Management Overhaul: Survey

Two months after the collapse of Silicon Valley Bank (SVB), triggered by a social media-fuelled panic, banking executives across America are reevaluating their approach to online platforms. The crisis sparked a broad recognition of the impact of social media on the financial industry, prompting a renewed focus on risk management and mitigation. An array of strategies are now under development in boardrooms nationwide. These measures are designed to combat potential online threats such as unfounded rumors about a bank’s financial health, which could trigger large-scale deposit withdrawals or negatively impact share prices. This insight comes from several banking industry executives and analysts, who suggest that these previously unreported efforts represent an urgent, adaptive response to the rapidly changing digital environment. A new perspective on social media is taking shape within the industry, shifting its perceived role from a mere marketing tool to a significant risk factor. This comes in the wake of a Twitter storm that questioned the financial stability of SVB, which led to a panicked withdrawal of $1 million per second from customers’ accounts, ultimately culminating in the bank’s failure on March 10. “Social media risk, once seen as primarily reputational, has now proven to pose existential threats, leading to deposit flight risks,” said Sumeet Chabria, the founder of ThoughtLinks, a consultancy firm specializing in banking. In his testimony to the Senate Banking Committee, Greg Becker, former CEO of SVB, pointed to social media as an “unprecedented” factor in the bank’s downfall. SVB’s depositors withdrew a staggering $42 billion in just 10 hours, sending shockwaves through the financial markets. The rapid demise of SVB began with the bank’s announcement on March 8 of its plans to sell securities and raise capital. This move ignited concerns about its financial health, with tech industry clients in the Bay Area turning to Twitter to express their apprehension and withdraw funds through mobile apps and online banking. This chain of events served as a stark warning to the industry, echoed two months later when First Republic Bank also collapsed, with its former CEO, Michael Roffler, likewise citing social media as the culprit. According to Chabria, these incidents have triggered a wake-up call among smaller lenders, who are now updating their emergency response and risk capabilities, and revising their business continuity plans to address this emerging threat. As part of this strategic shift, bank executives and directors are incorporating social media into their risk-management programs. According to regional bank executives, who wished to remain anonymous due to the private nature of the discussions, risk departments have been tasked to detail out comprehensive plans that allow banks to measure, anticipate, and respond effectively to internet-related risks. To tackle potential issues at the earliest stage, banks are also making it a priority to promptly address any complaints expressed by customers on social media platforms. That sentiment was echoed by Greg Hertrich, the head of U.S. depository strategies at Nomura, who said: “Any bank that doesn’t pay attention to their social media presence, and the effect it might have on depositor behavior, is doing themselves, their stakeholders and most importantly, their depositors, a pretty significant disservice.” Smaller lenders are concentrating their efforts on identifying depositors and leveraging influential community members to counteract potential misinformation. Lindsey Johnson, CEO of the Consumer Bankers Association, stated: “Many banks are taking a proactive approach to communicate to their customers to convey the right message.” This approach includes the dissemination of factual information and resources to depositor bases via email, Twitter, and LinkedIn. In a recent analysis, professors Anat Admati, Martin Hellwig, and Richard Portes present a scathing critique of the U.S. banking sector’s systemic issues, brought into focus by the 2023 banking crisis. Their analysis, in particular, centers around the failure of Silicon Valley Bank (SVB) and First Republic Bank, highlighting the systemic issues afflicting U.S. banks. The analysis suggests that the crisis in U.S. banking is systemic, not because of the interconnectedness of banks, but due to similar banking strategies they’ve adopted. SVB’s failure in March 2023, following a run on deposits, is a case in point. In 2019, SVB’s financials showed $62 billion in deposits, $33 billion in loans, and $29 billion in securities. Fast forward to March 2022 and the bank’s deposits had tripled, with loans and securities also experiencing significant growth. However, the Federal Reserve’s decision to raise interest rates in 2022 started a chain reaction. Investors gradually moved from deposits to money market investments that paid higher interest. By March 2023, the bank had incurred loss

Social Media Panic Triggers Banking Risk Management Overhaul: Survey

Two months after the collapse of Silicon Valley Bank (SVB), triggered by a social media-fuelled panic, banking executives across America are reevaluating their approach to online platforms. The crisis sparked a broad recognition of the impact of social media on the financial industry, prompting a renewed focus on risk management and mitigation.

An array of strategies are now under development in boardrooms nationwide. These measures are designed to combat potential online threats such as unfounded rumors about a bank’s financial health, which could trigger large-scale deposit withdrawals or negatively impact share prices. This insight comes from several banking industry executives and analysts, who suggest that these previously unreported efforts represent an urgent, adaptive response to the rapidly changing digital environment.

A new perspective on social media is taking shape within the industry, shifting its perceived role from a mere marketing tool to a significant risk factor. This comes in the wake of a Twitter storm that questioned the financial stability of SVB, which led to a panicked withdrawal of $1 million per second from customers’ accounts, ultimately culminating in the bank’s failure on March 10.

“Social media risk, once seen as primarily reputational, has now proven to pose existential threats, leading to deposit flight risks,” said Sumeet Chabria, the founder of ThoughtLinks, a consultancy firm specializing in banking.

In his testimony to the Senate Banking Committee, Greg Becker, former CEO of SVB, pointed to social media as an “unprecedented” factor in the bank’s downfall. SVB’s depositors withdrew a staggering $42 billion in just 10 hours, sending shockwaves through the financial markets.

The rapid demise of SVB began with the bank’s announcement on March 8 of its plans to sell securities and raise capital. This move ignited concerns about its financial health, with tech industry clients in the Bay Area turning to Twitter to express their apprehension and withdraw funds through mobile apps and online banking. This chain of events served as a stark warning to the industry, echoed two months later when First Republic Bank also collapsed, with its former CEO, Michael Roffler, likewise citing social media as the culprit.

According to Chabria, these incidents have triggered a wake-up call among smaller lenders, who are now updating their emergency response and risk capabilities, and revising their business continuity plans to address this emerging threat.

As part of this strategic shift, bank executives and directors are incorporating social media into their risk-management programs. According to regional bank executives, who wished to remain anonymous due to the private nature of the discussions, risk departments have been tasked to detail out comprehensive plans that allow banks to measure, anticipate, and respond effectively to internet-related risks.

To tackle potential issues at the earliest stage, banks are also making it a priority to promptly address any complaints expressed by customers on social media platforms.

That sentiment was echoed by Greg Hertrich, the head of U.S. depository strategies at Nomura, who said: “Any bank that doesn’t pay attention to their social media presence, and the effect it might have on depositor behavior, is doing themselves, their stakeholders and most importantly, their depositors, a pretty significant disservice.”

Smaller lenders are concentrating their efforts on identifying depositors and leveraging influential community members to counteract potential misinformation. Lindsey Johnson, CEO of the Consumer Bankers Association, stated: “Many banks are taking a proactive approach to communicate to their customers to convey the right message.” This approach includes the dissemination of factual information and resources to depositor bases via email, Twitter, and LinkedIn.

In a recent analysis, professors Anat Admati, Martin Hellwig, and Richard Portes present a scathing critique of the U.S. banking sector’s systemic issues, brought into focus by the 2023 banking crisis. Their analysis, in particular, centers around the failure of Silicon Valley Bank (SVB) and First Republic Bank, highlighting the systemic issues afflicting U.S. banks.

The analysis suggests that the crisis in U.S. banking is systemic, not because of the interconnectedness of banks, but due to similar banking strategies they’ve adopted. SVB’s failure in March 2023, following a run on deposits, is a case in point.

In 2019, SVB’s financials showed $62 billion in deposits, $33 billion in loans, and $29 billion in securities. Fast forward to March 2022 and the bank’s deposits had tripled, with loans and securities also experiencing significant growth. However, the Federal Reserve’s decision to raise interest rates in 2022 started a chain reaction. Investors gradually moved from deposits to money market investments that paid higher interest. By March 2023, the bank had incurred losses on securities and was unable to raise more equity, prompting a massive run that led to its closure.

“Today, policymakers, lobbyists, and commentators seem to miss the obvious lesson: ignoring insolvencies while also insuring deposits can lead to disastrous outcomes,” according to an article Admati sent.

“The Federal Reserve is now providing liquidity support without restoring solvency, prolonging the agony and encouraging some banks to start gambling for resurrection as the S&Ls did in the 1980s.”

Reuters contributed to this report.