Social Media Catalyzed Recent Bank Failures, Paper Says
“Social media fueled a bank run on Silicon Valley Bank (SVB), and the effects were felt broadly in the U.S. banking industry,” reads the first line of an academic paper discussing the role of social media in last month’s collapse of tech bank SVB.
The study, led by J. Anthony Cookson of the University of Colorado Boulder, said that social media chatter “amplified” the risks that ultimately led to the bank’s failure.
In March, SVB, a bank that primarily served startup businesses, became the largest bank failure in the United States since the 2008 financial crisis and the second-largest ever in U.S. history, all within a 48-hour period. Members of the venture capital community, who were investors in the very companies affected by SVB’s collapse, have expressed remorse over their role in spreading panic, with one referring to it as a “hysteria-induced bank run caused by VCs.”
The newly published paper alleges that “tweets in the run period with negative sentiment translate[d] into immediate stock market losses,” referring to the period of time between Jan. 1, 2020, to March 13, 2023. It is this window that the authors of the paper analyzed original tweets containing a financial institution’s stock tickers and examined stock price data and hourly stock returns from the first half of March to identify the impact of bank-related tweets on stock returns.
The paper notes that the “effects are stronger when tweets are authored by members of the Twitter startup community (who are likely depositors) and contain keywords related to contagion.” Cookson and his fellow researchers stop just short of pinning the entire banking crisis on prominent Twitter users.
David Sacks, a start-up centi-millionaire who co-founded a host of different tech companies, including PayPal, was one of many sounding the alarm over SVB at the time.
“If the Fed doesn’t nip the bank run in the bud, regional banks will be decimated, and all that will be left is the biggest banks,” Sacks tweeted on March 10. “You know, the ‘too big to fail’ ones. This will not help the little guy.”
The paper found that such tweets had a material impact on SVB depositor behavior.
“During the run period, we find the intensity of Twitter conversation about a bank predicts stock market losses at the hourly frequency,” the paper revealed. “These results are consistent with depositors using Twitter to communicate in real-time during the bank run.”
Pershing Square founder William Ackman was another influential voice at the time of the collapse, warning of subsequent bank failures if SVB was not bailed out.
“Absent a systemwide Federal Deposit Insurance Corporation deposit guarantee, more bank runs begin Monday am,” he tweeted on March 11.
By warning of further crises, the paper alleges that these voices on Twitter were inadvertently exacerbating the problem.
“Communication and coordination pose a risk to banks, especially when many of the deposits in the bank are uninsured,” the academic paper states. “The amplification of bank run risk via Twitter conversations is a unique opportunity to observe communication and coordination that shapes a critically important economic outcome—distress in banks.”
Risks ‘Unique to the Social Media Era’
Furthermore, the paper highlights that SVB is only one of many banks to face this novel risk channel. “Open communication by depositors via social media increased the bank run risk for other banks that were exposed to such discussions in social media beforehand,” the authors wrote.
The findings of this research highlight the significant influence of social media in shaping economic outcomes and raise concerns about the ongoing risks faced by banks in the digital age. As social media continues to permeate through various aspects of society, the authors of the paper caution that this risk is unlikely to dissipate but rather may impact other outcomes as well.
“Discussion amplifies risk,” Cookson told The New York Times in an interview last week. He and his colleagues identified this form of financial risk as “unique to the social media era.”
“Given the increasingly pervasive nature of social communication on and off Twitter, we do not expect this risk to go away,” Cookson and the paper’s other authors wrote.
