The Impact of Social Media on Bank Runs
The first Twitter-fueled bank run
In March 2023, Silicon Valley Bank (SVB) experienced a bank run that was fueled by social media. Depositors withdrew $42 billion in just 24 hours, leaving the bank on the brink of collapse. The bank run was triggered by rumors on social media about the bank's solvency. Anxious Twitter posts and WhatsApp exchanges, coupled with the ease of access that online banking provides, are seen by analysts as a serious catalyst for the current crisis. Experts suggest that in the social media age, the psychological behavior behind a bank run – mass fear from depositors of losing their savings – may be amplified and go viral quicker than bank officers and regulators can successfully respond.
The speed at which depositors fled Silicon Valley Bank has left authorities confronting a new risk: the social media-driven bank run. Billionaire hedge fund manager William Ackman warned a few days after SVB's collapse that "no bank is safe from a run" in a world with online bank accounts and social media unless the government gives depositors an explicit guarantee of "complete access" to all of their cash. The entire banking industry is now grappling with the fact that they could be the next target of a social media-fueled bank run.
How social media has changed the way we perceive and respond to financial crises
In the past, bank runs were triggered by rumors that spread through word of mouth. It would take days or even weeks for the rumors to spread, giving regulators and bank officers enough time to respond. However, with the rise of social media, rumors can spread like wildfire, leading to a bank run in a matter of hours.
Social media has also changed the way we perceive financial crises. In the past, bank runs were seen as a local phenomenon that affected only a few depositors. However, with the rise of social media, bank runs can quickly become a global phenomenon that affects the entire banking industry. The hive-like behavior is similar to what happened during the 2021 “meme stock” boom where companies were targeted by groups of mostly retail investors, although in that case groups of investors were using social media to push stocks higher.
The role of regulators and policymakers
Regulators, policymakers, and bankers are looking at the role that digital messaging and social media may have played in the collapse of Silicon Valley Bank. Some in the banking industry play down the risks of another SVB-style downfall spurred by social media. They point to SVB's unique vulnerability to a social media-driven bank run, given its highly concentrated customer base of technology and venture capital entrepreneurs who mingled in the same circles.
However, others believe that social media has changed the game and that regulators and policymakers need to adapt to the new reality. Michael Imerman, a professor at the Paul Merage School of Business at the University of California-Irvine, says that what happened to SVB was, “a bank sprint, not a bank run, and social media played a central role in that” . Regulators and policymakers need to be more proactive in monitoring social media and responding to rumors before they go viral. They also need to work with banks to develop strategies to mitigate the impact of social media on bank runs.
Social media has changed the way we communicate, share information, and conduct business. However, it has also changed the way we perceive and respond to financial crises. Bank runs can now be triggered by rumors that spread like wildfire on social media, leading to a collapse of the banking system. Regulators, policymakers, and bankers need to adapt to the new reality and develop strategies to mitigate the impact of social media on bank runs. The future of the banking industry depends on it.
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