Shares in banks all over the world have plummeted in recent days as fears that the collapse of Silicon Valley Bank (SVB) could precipitate a wider crisis in the sector.
The speed at which market jitters have spread across the world have forced bank executives and regulators to move with unprecedented swiftness: US authorities guaranteed all deposits in SVB – and smaller bank Signature – 48 hours after it collapsed. Just hours after Credit Suisse’s share price plunged on Wednesday, the Swiss central bank stepped in with a $54bn loan.
While there’s nothing new about a financial emergency, these crises – and their resulting responses – are unique in having been accelerated by a frenzy of social media chatter that has fuelled the panic.
‘It was a bank sprint, not a bank run’
A bank run occurs when customers lose faith in an institution’s ability to look after their money, and large numbers withdraw their deposits all at once. As more people withdraw their funds, the likelihood of the bank being able to cover the withdrawals falls, leading more customers to pile in and demand the return of their money.
“If you see a bomb disposal expert running down the street, don’t ask them what’s happened, just try to keep up,” writes Daniel Davies, the managing director of Frontline Analysts, in the Financial Times.
Rumours around a bank’s solvency can build up for months or years before it leads to a run. Or it can happen in a matter of hours.
The collapse of SVB was the second-largest bank failure in the history of the United States. The largest, Washington Mutual in 2008, took place over the course of eight months. SVB’s collapse played out in barely two days.
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 behaviour 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.
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.”
‘You should be absolutely terrified right now’
What few SVB customers realised a week ago was how vulnerable their bank was. Like all banks, it had invested its customers deposits, with much of the money going into long-dated US government bonds. The problem was that bonds have an inverse relationship with interest rates, so when the Federal Reserve started to hike rates rapidly to combat inflation, the bonds SVB owned started to lose significant value.
Many of SVB’s customers were also hurt by interest rate rises and needed to access their deposits to meet day-to-day business expenses. But with the value of their investments squeezed, the bank struggled to meet their customers demands.
A decision to raise funds through a sale of shares proved to be the bank’s death knell. Venture Capital firm, Founders Fund, is reported to have told companies in its portfolio to move their money out of SVB. In the gossip-fuelled world of Silicon Valley, this news spread like wildfire. Customers withdrew $40bn – one-fifth of SVB’s deposits – in just a few hours.
Mark Tluszcz, CEO of Mangrove Capital, tweeted: “If you are not advising your companies to get the cash out, then you are not doing your job as a board member or as a shareholder.”
Investor Bill Ackman tweeted that if federal regulators didn’t quickly step in and guarantee all deposits, runs on other banks would start on Monday.
“You should be absolutely terrified right now,” investor Jason Calacanis tweeted, using all capital letters for emphasis. “That is the proper reaction to a bank run and contagion.”
Other high-profile entrepreneurs sounded the alarm which spread on social media, resonating loudly with the bank’s customers who tended to be tech-savvy entrepreneurs keenly tuned in to online chatter.
Congressman Patrick McHenry, chairman of the US House Financial Services Committee, referred to the turmoil as, “the first Twitter fuelled bank run.”
Some messages that caused cold sweats among financial customers proved to be misleading, prompting calls to focus on facts not speculation.
“The last several days represent a unique incident fuelled by misinformation on social media and are not indicative of the health of our industry,” said Lindsey Johnson, president of the Consumer Bankers Association, in a statement.
The fear spreads
SVB might be the first bank run of the social media era, but it wasn’t the first bank to see its fundamental business rocked by feverish Twitter speculation.
Early on Thursday, Switzerland’s Credit Suisse announced that it would take a $53.7bn loan from the Swiss central bank to shore up its finances after its share price fell by as much as 30%. The selloff occurred when the bank’s largest shareholder, Saudi National Bank (SNB), ruled out providing it with fresh funding because of restrictions limiting its holding.
However, SNB’s chairman said Credit Suisse was “a very strong bank” and was unlikely to need more cash after a major restructuring plan in autumn last year. A cap on how large its stake could be was the reason for not investing further.
Credit Suisse’s problems are not new, the bank’s customers have weathered a series of scandals and stock fluctuations over the past decade which have led to an exodus of clients, pulling their cash from the bank, contributing to losses that grew to 7.3bn Swiss francs in 2022.
But last October, its shares fell 12% in one day after a journalists tweeted that a “major international investment bank” was on the brink. The tweet was then wrongly paraphrased by investing.com, which tweeted it out to their thousands of followers. The rumour spread like wildfire across online forums and social media accounts, but was, at least then, unfounded.
Credit Suisse’s issues were well established by then and its share price had been declining for months, but experts have pointed to the tweet, and its subsequent dissemination, as highly damaging to the bank.
Regulators, policymakers and bankers are all now being forced to look at the role that social media may have played in the current upheaval – and work out what they can possibly do to stay ahead of the rumours.
Associated Press and Agence France-Presse contributed to this report