Ndubuisi Francis in Abuja
A new report by S&P Global Ratings has advised banks across the world to consider social media in their liquidity risk management activities.
According to the report, bank failures in 2023, such as the collapse of Silicon Valley Bank, were often characterised by substantial and rapid deposit outflows exacerbated by negative social media.
S&P Global Ratings believes social media is unlikely to be the sole driver of a bank run, but it has the potential to accelerate deposit outflows at structurally weak lenders.
“In all cases, the troubled banks had underlying issues, including financial imbalances, structural deficiencies, and notable shortcomings in risk management and governance.
“Yet, once a bank is vulnerable to liquidity stress, social media activity, regardless of its veracity, can quickly expose weaknesses by eroding client confidence and accelerating deposit outflows,” said S&P Global Ratings analyst, Cihan Duran.
S&P Global Ratings distinguishes the threats posed by both open platforms — such as Facebook, Instagram, LinkedIn and X, which can be scrutinised by banks and regulators — and platforms dominated by “private groups” such as WhatsApp, Signal and Discord.
It notes that it is difficult to control the spread of malicious information in private groups, but that open platforms can quickly reach massive audiences, making damage control difficult.
Beside straight bank runs, the report noted that interest rate hikes have already increased the volatility of deposits as savers have the opportunity to switch to better remunerated products.
In this context, social media could further complicate banks’ deposit management by accelerating the dissemination of information, potentially leading to rapid liquidity flows, it posited..
Although not everybody shares the view, social media and online access to bank accounts are the main accepted explanations behind the fast run on SVB.
“I think it is demonstrably false, because if you want to move a lot of money out of a bank, you have to do a wire and that takes a while.
” I don’t think the run on SVB per se was caused by Twitter either,” said Hilary J. Allen, professor of law at the American University Washington College of Law.
“Rather it has been reported how (venture capital) funds told their portfolio companies to not spread the news online. Once it became clear that SVB was going to fail, there was instead a lot of (online) activity trying to scare the regulator into bailing out SVB’s uninsured depositors,” Allen said.
Steven Kelly, Associate Director of Research at the Yale Programme on Financial Stability echoed his remarks.
. “The ‘the internet caused the bank run’ narrative lacks material evidence and structural consistency with the actual dynamics of the bank runs,” he wrote in the Financial Times.
Kelly concluded that just because modern bank crises can be watched on X, formerly known as Twitter, it does not mean that is where they happen.
In late January, the European Central Bank had reportedly asked some banks to monitor activity on social media to detect any worsening in sentiment that could lead to a deposit run.
The Japanese regulator said it plans to conduct a stress test on around 20 banks by the end of June 2024 to assess the ability of the country’s banks to withstand a social media-fuelled run on deposits, a media report uncovered.
In October, the Financial Stability Board will present to the G20 its findings from a “deep dive” on how social media can speed up bank deposit outflows and whether changes to liquidity rules are needed.
S&P Global Ratings said it believes regulators, in at least some jurisdictions, “could update liquidity rules to better capture the risk of deposit flight, notably on uninsured deposits and deposits deemed slippery due to digital banking.”
