In a shocking turn of events, Silicon Valley Bank (SVB) crumbled under the weight of an internet-fueled frenzy just two months ago, sending shockwaves through the banking industry. Since then, executives from banks across the United States have been huddled in boardrooms, devising strategies to counter online threats that could trigger deposit outflows or negatively impact stock prices.
These efforts, unbeknownst to the public until now, highlight the urgent need for banks to adapt to the changing landscape, preventing panicked depositors from inciting bank runs or shielding their shares from online attacks by short sellers.
Driven by the swift downfall of SVB, banks are reevaluating the role of social media as a potential risk rather than just a marketing tool. The cascade of tweets questioning SVB’s financial health triggered a wave of unease among customers, resulting in a staggering $1 million per second being withdrawn from their accounts, ultimately leading to the bank’s failure on March 10.
Sumeet Chabria, the founder of ThoughtLinks, a consulting and advisory firm working with banks, emphasized the gravity of the situation, stating, “Social media risk was primarily reputational, but now it has led to deposit flight risks, which are existential.”
Greg Becker, the former CEO of SVB, described social media as an “unprecedented” factor in the bank’s demise, revealing that depositors withdrew a staggering $42 billion in just 10 hours. These revelations were disclosed in Becker’s testimony to the Senate Banking Committee earlier this week.
The sudden collapse of SVB sent shockwaves through the market. On March 8, the bank announced its plans to sell securities and raise capital, but as concerns about its financial health grew, anxious clients in the Bay Area tech industry took to Twitter to voice their worries and swiftly withdrew funds using mobile apps or online banking.
The former CEO of First Republic Bank, Michael Roffler, similarly attributed social media to the downfall of his institution two months later.
The wake-up call of SVB’s demise has prompted smaller lenders to update their emergency response and risk capabilities, along with their business continuity plans, in an effort to combat this new threat.
Chabria noted that bank executives and directors have instructed their companies to incorporate social media into their risk management programs, a development shared by regional bank executives who spoke on the condition of anonymity due to the private nature of the discussions.
According to one of these executives, risk departments have been tasked with developing comprehensive plans that enable banks to measure, prepare for, and respond to internet-related risks. Banks are also proactively reaching out to customers who voice complaints on social media to swiftly address their concerns, aiming to nip potential problems in the bud.
Greg Hertrich, head of U.S. depository strategies at Nomura, cautioned that what transpired at SVB could easily happen elsewhere. He stressed the importance for banks to pay close attention to their social media presence and its potential effect on deposit behavior. Failure to do so, he argued, would be a disservice to stakeholders and, most importantly, depositors.
Smaller lenders are particularly focused on identifying their depositors and leveraging influential community members to counter any misinformation. Lindsey Johnson, CEO of the Consumer Bankers Association, emphasized that many banks are taking a proactive approach by communicating directly with their customers through various channels such as email, Twitter, and LinkedIn. This outreach involves providing accurate information and resources to reassure depositors.
Even the largest lenders are taking note of the social media landscape. Jamie Dimon, CEO of JPMorgan Chase & Co, cited social media as a contributing factor to SVB’s failure, and Jane Fraser, CEO of Citigroup Inc, referred to it as a “complete game changer.”
The collapse of SVB and Signature banks rattled confidence in regional lenders, leading to a sharp decline in First Republic’s stock. Despite posting customer testimonials on LinkedIn to restore faith, a lifeline of $30 billion from 11 major lenders couldn’t prevent First Republic’s descent. Regulators ultimately seized the bank, and it was acquired by JPMorgan earlier this month.
Regulatory bodies are closely monitoring the situation as well. The U.S. Federal Deposit Insurance Corporation and the Federal Reserve both highlighted how technology has accelerated bank runs. Additionally, the Financial Stability Board, an international body, is investigating the role of social media in recent market turmoil, according to a source.
While some banks have devised comprehensive game plans, others are still grappling with the challenge. Jim Perry, senior strategist at Market Insights, highlighted that despite the availability of numerous social media monitoring tools, their usage is often delegated to overburdened marketing teams or third-party vendors.
Perry underscored that banks are becoming increasingly aware of the risks and the need to allocate more resources to social media monitoring, but for many small lenders, it has yet to become a top priority.
The SVB catastrophe served as a wake-up call for the banking industry, igniting a race to fortify risk management, monitoring, and emergency procedures to counter the perils of social media. It’s a battle for survival in an era where a single tweet can send shockwaves through the financial world, and only those who adapt swiftly and effectively will emerge unscathed.