Digital Bank Runs: Social Media's Role in Financial Failures

Strategic Insights -

The recent collapse of several high-profile US banks has highlighted the threat posed by "digital bank runs," which occur when social media chatter snowballs into panic over a bank's stability. Unlike traditional bank runs, which are typically orderly and occur in person, digital bank runs can spread rapidly through online channels, leading to widespread withdrawals and even bank failure. In the case of Silicon Valley Bank, negative tweets about the bank were closely correlated with a drop in its stock price, with research suggesting that social media contributed to the run on the bank.

Key Takeaways:

  • Digital bank runs are a new threat to financial stability, characterized by the rapid spread of panic over a bank's stability through social media channels.
  • Social media platforms such as Twitter can amplify negative information about a bank, leading to a snowball effect that can accelerate a digital bank run.
  • The failure of Silicon Valley Bank in March 2023 was associated with a significant drop in deposits, totaling $40 billion (£32 billion) in a matter of hours, with 23% of total deposits withdrawn.
  • In contrast, it took Washington Mutual nine days to lose $17 billion (9% of its deposits) in 2008.
  • The divide between depositors and the banking system, exemplified by fractional banking, increases the risk of a bank run.
  • Concerns about a single bank can spread to other banks, leading to panic, widespread bank failures, and eventual economic recession.
  • A lack of transparency and communication can exacerbate a digital bank run, as seen in the recent collapse of First Republic Bank.
  • Governments can help prevent digital bank runs by proactively addressing concerns and providing reassurance, as seen in Germany's response to the Deutsche Bank crisis.
  • Investors and depositors should be cautious about reacting to social media chatter, and instead seek out expert opinions and information from a wide range of sources.
  • Professional investors and traders often use diversified sources of knowledge, including discussions with colleagues, to inform their decisions.

Statistics:

  • $40 billion (£32 billion) in deposits withdrawn from Silicon Valley Bank in a matter of hours
  • 23% of total deposits withdrawn from Silicon Valley Bank
  • It took Washington Mutual nine days to lose $17 billion (9% of its deposits) in 2008
  • A rise in negative tweets about Silicon Valley Bank was followed by a drop in its stock price
  • The failure of Silicon Valley Bank was associated with a significant drop in deposits, with 23% of total deposits withdrawn

Sources:

  • The Conversation -- UK -- By Daniel Beunza, Professor of Social Studies of Finance, City, University of London
  • New research paper on the role of social media in the collapse of Silicon Valley Bank
  • Deutsche Bank's share price drop on April 24 2023
  • US banking giant JP Morgan's acquisition of First Republic Bank on May 1
  • Everett Collection/Shutterstock, image of a bank run on the Adolf Mandel Bank in 1912