The collapse of Silicon Valley Bank, First Republic Bank and Signature Bank in close succession in March 2023 demonstrated how quickly a run on a bank can accelerate in a post-social media world. In our latest free report, we look at how banks may mitigate social media risk and consider how regulators could be tackling the issue in the near future.
SVB: “The first Twitter-fuelled bank run.”
In March 2023, the world witnessed the collapse of Silicon Valley Bank (SVB), America’s 16th largest lender – and the biggest bank failure since the catastrophic collapse of Washington Mutual in 2008.
On Wednesday 8th March, SVB announced a US$1.8bn loss due to asset sales in order to meet depositor withdrawal requests. Trading of its stock was then halted on the morning of Friday 10th March, when its price plummeted by 68%. By Monday, its US business had completely collapsed, and other SVB branches around the world quickly followed. Its UK business was bought for £1 by HSBC in a Government-backed rescue deal the same day.
What caused SVB’s collapse?
SVB had been operating for 40 years, specialising in servicing companies in the technology sector. During the Covid-19 pandemic, SVB capitalised on the growth of tech startups as demand for IT increased due to remote working.
SVB also invested heavily in the US government bonds market, which was negatively impacted by 2022’s hike in interest rates (implemented by the Federal Reserve to try to combat rising inflation.) This significantly impacted the value of SVB’s portfolio, which might not have been such a problem in the long-term if it had been able to keep hold of its investments – however, economic conditions soon led to many investment funds advising their clients to withdraw funds from SVB. This information began to drip through to social media and the resultant liquidity issues forced SVB to sell many of its bonds at a loss, which in turn caused depositors to become anxious, leading to a run on the bank. “In a series of risk management oversights, macroeconomic factors and the good old fashioned rumour mill, Silicon Valley Bank (SVB) went through a liquidity crisis, causing a bank run on their deposits,” said Forbes.
A bank sprint, not a run
A key consideration for banks is the speed with which this run on deposits was able to take place. Instead of standing in line outside a branch to withdraw funds, depositors were able to withdraw cash in a matter of seconds via their banking app. SVB’s client base was also very tech-heavy, making it even more likely that depositors would be users of social media and digital banking. As one expert put it, the SVB collapse was “a bank sprint, not a bank run, and social media played a central role in that.” Patrick McHenry, chairman of the US House Financial Services Committee dubbed SVB’s collapse “the first Twitter-fuelled bank run.”
Credit Suisse: a social media storm
Another notable bank collapse from 2023 was Credit Suisse. Its downfall was caused by many factors, including several regulatory scandals. But its actual eventual collapse (and subsequent takeover by UBS) was ultimately set in motion by a single Tweet made by Australian journalist for ABC News, David Taylor.
On Saturday 1st October, 2022, Taylor posted a mysterious Tweet suggesting that a large investment bank was “on the brink” of collapse. Taylor did not name Credit Suisse in his Tweet, but nevertheless, it set the rumour mill in motion and before long, Credit Suisse was being mentioned in online forums, including Reddit’s notorious Wallstreetbets, which currently has around 15 million followers.
Taylor deleted his Tweet two days later, but by then, the damage had already been done, with Credit Suisse shares already down 12%. In the following months, investors continued withdrawing funds and selling shares. Credit Suisse disclosed in November 2022 that clients had withdrawn about US$67.4bn since the beginning of October – when the Tweet was posted – which was equivalent to 10% of the bank’s wealth management assets. From then on, the situation for Credit Suisse looked increasingly bleak. The bank was eventually taken over by UBS in March 2023, as the banking sector came under stress caused by the collapse of SVB, First Republic Bank and Signature Bank.
GameStop: gaming the market
The events of March 2023 weren’t the only example of how social media can impact the markets. In January 2021, American video game retailer, GameStop, began receiving attention from retail investors after it was revealed on a Reddit forum that hedge funds were shorting the stock. Short selling works on the premise that a stock is currently overpriced and is likely to fall in value at some point in the near future. An investor borrows some stocks from a brokerage and immediately sells them on; the value of the stock then (in theory) decreases and the investor buys the stock back at the current, cheaper, market value. They then return the stocks to the brokerage, keeping the difference in price.
Online discussion around GameStop began as an opportunity for retail investors to profit by shorting the stock too, but it soon escalated into an online campaign to beat large, multi-billion-dollar hedge funds at their own game by hiking the GameStop share prices higher and higher, so that they were forced to sell at a loss.
Stress testing social media
S&P Global Ratings (S&P) has recommended banks monitor social media as part of their liquidity risk management. In a report published by the agency in February 2024, it said social media “chatter” can potentially “accelerate deposit outflows at structurally weak lenders and has been a factor in some recent bank failures.” It also said that while social media is unlikely to be the sole driver of a bank run, five billion users, “an ability to rapidly distribute (sometimes false) information,” and “its potential to stress liquidity buffers, shouldn’t be ignored.” The report adds that in all of the bank collapses experienced in March 2023, the 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.”
Regulators are also taking note of the impact of social media on banking risk. In the wake of SVB, the US Federal Reserve said “the combination of social media, a highly networked and concentrated depositor base and technology, may have fundamentally changed the speed of bank runs.”
So how can banks respond from a risk management and stress testing point of view? “We can stress test a portfolio for the 2008 crisis, for what happens if oil prices rise to US$200, or how we should fare if inflation jumped to 20%, and we could be in the ballpark,” writes David Coombs, head of multi-asset investment at Rathbones. “But nothing on earth can measure the impact of a social media rumour creating fears of systemic risk in a sector of the economy…This is a global issue and not easily legislated for, let alone monitored…Policymakers and regulators need to start looking at this and fast. Mischievous and manipulative rumours, coupled with the rise of algorithmic and quantitative trading strategies (where robots scrape the internet for data and invest automatically), create serious volatility and even permanent loss of capital.”
Open vs closed platforms
It’s important for firms to differentiate between open social media platforms such as Instagram, Facebook, LinkedIn and X, and closed platforms such as WhatsApp, which mostly involve private group messaging. “Dissemination of malicious information can be difficult to monitor in private groups, limiting the ability of banks and regulators to react effectively,” says S&P. “Meanwhile, open platforms can quickly reach massive audiences, making damage control difficult.”
WhatsApp has been a key focus for the regulators in recent years, in particular since the Covid-19 pandemic led to many bankers turning to WhatsApp and similar apps as an easy means of communication. Morgan Stanley, JPMorgan Chase, Citigroup, Goldman Sachs, Bank of America, Credit Suisse, Deutsche Bank and UBS were all fined in 2022 for breaching record-keeping violations in relation to WhatsApp usage. WhatsApp has two billion global users and handles more than 100 billion messages every day. It is a free messaging app, allowing individuals to make voice calls and send messages and files with end-to-end encryption. If a message is encrypted, it cannot be accessed by other parties and can be permanently and irretrievably deleted – making it problematic for compliance teams trying to monitor communications between staff. The named banks were fined a combined total of US$549m by US regulators for failing to keep records of work-related messages sent via WhatsApp and Signal (a similar app) in the wake of the mass remote working experienced during the pandemic.
A survey by tech firm Global Relay last year found 59% of respondents – including some of the world’s biggest banks – had banned the use of platforms such as Whatsapp. HSBC reportedly banned ordinary SMS text messages on all work phones in October last year, having already prohibited the use of WhatsApp. Though this will help banks to demonstrate to regulators that they are acting on the problem, it won’t necessarily eliminate it. The same survey revealed just 3% of firms felt confident that bans would actually result in compliant behaviour amongst employees.
The FCA: crackdown on non-financial misconduct
The UK’s Financial Conduct Authority has announced an initiative focussing on combating non-financial misconduct in firms. The regulator already has the right to take action against non-financial misconduct, including the right to ban perpetrators from working within the industry. But experts are now speculating on how this new focus might impact the regulation of social media.
“The FCA has asked regulated firms in a recent survey to scrutinise activities of their employees beyond their ordinary day-to-day duties,” says Susan Thompson, a partner at Simkins law firm. “This will include a review of client entertaining outside of usual working hours and even considering how staff socialise with colleagues in their spare time…It is common for HR to screen candidates’ social media profiles prior to them being offered employment. However, firms may now need to perform an ongoing review of employees’ social media activity as well, something that firms are unlikely to be currently doing. It is likely to become common for employees to be asked to disclose information to employers about their social media profiles. This is to ensure that employees can illustrate acceptable behaviour both in their professional and their private lives. These measures could prove to be quite controversial with employees.”
Regulating financial influencers, or “Finfluencers”
Social media influencers are now a key part of the global economy and are used to promote millions of products and services, including for the financial services industry. Examples of financial institutions using influencers to market their products and services include CapitalOne, Starling, banking app Revolut and Monzo Bank.
The number of followers some influencers have is staggering and far outweighs the readership/audience of any traditional media outlet. And the influence they have because of this following should not be underestimated. One example of this at play occurred in 2018 when reality TV star, Kylie Jenner, accidentally wiped US$1.3bn off the share price of social media company Snap (owners of SnapChat) with a single Tweet to her 24.5 million followers saying she never really opened SnapChat anymore. She now has more than 40 million followers on X and 400 million on Instagram.
Other examples of how public figures with a sizable following can impact business are plentiful – whether intentionally or not. Elon Musk has been accused several times of trying to manipulate share prices via social media. With this in mind, financial regulators are trying to provide a framework for so-called finfluencers to follow. In February 2024, the European Securities and Markets Authority (ESMA) and other “national competent authorities” in Europe published requirements for individuals posting investment recommendations via social media – and warned about the risk of market manipulation. “When posting on social media, transparency and accuracy are key, especially when making recommendations about investments,” says the guidance. “If you are a finance influencer, a technical expert, or someone with just interest in financial investments, you need to be aware of the rules established under the MAR [Market Abuse Regulation] Framework and be able to recognise an investment recommendation.”
The requirements of the MAR around posting on social media are as follows:
- Include the identification of the producers of the recommendation: name, job title of all the persons involved, and the date and time of the recommendation.
- Ensure the objective presentation of investment recommendations: facts clearly distinguished from interpretations, estimates and opinions. Confirm all sources of information are reliable and, where in doubt, clearly indicate it.
- Disclose any conflicts of interest in a clear way, so investors would take notice of it. When recommendations are voiced via different social media channels, each of them must include a disclosure of interests or conflicts of interest.
Additional requirements of the MAR in relation to social media posts require “professionals” and “experts” to disclose:
- A summary of any basis of valuation/methodology and the underlying assumptions used.
- The length of time of the investment and an appropriate risk warning.
- The planned frequency of updates to the recommendation.
- If the recommendation has been amended after being disclosed to the issuer.
- If they hold a net long or short position above 0.5% of the total issued share capital of the issuer.
Building a suitable framework
The CFA Institute published a study in January 2024, looking into the risks and benefits of finfluencer activities and whether existing policy frameworks are sufficient to cover this area of financial activity. To do this, the CFA reviewed regulations relating to investment promotions and recommendations in the UK, US and EU. “Our review sought to understand the restrictions around providing investment advice and recommendations in each market and the protections afforded to consumers for acting on unsuitable advice, as well as the extent to which finfluencer activity might operate within these frameworks.” The institute also reviewed policies from different social media platforms to understand how they individually address finfluencer content.
The CFA recommends regulators cooperate to create and implement a clearer, more universal definition of an investment recommendation. “In addition to promoting products, we observed some finfluencers recommending that their audiences buy, sell, or hold financial instruments,” says the study. “Although laws regulating financial promotions and advertisements more generally are relatively comprehensive and consistent across the markets in this study, we found that what constitutes an investment recommendation is less clear, with differences in definitions in the markets we cover. To overcome the challenge finfluencer activities pose to the regulatory framework, IOSCO could design a common definition of an investment recommendation and strongly encourage its member jurisdictions to transpose this definition (or something substantially similar) into their laws. Overall, working toward a more universal definition of an investment recommendation would mean that regulations are sufficiently comprehensive to respond to new online and offline actors who may emerge in the future – particularly those that operate across borders.”
Although much of the above applies to investment firms and the like, banks and other financial institutions should still consider the third-party risks of employing influencers to promote their brand and recognise that leveraging social media influence can be both positive and negative.
| Van Eck Associates fined US$1.75m for disclosure failures over influencer The US Securities and Exchange Commission fined investment advisor, Van Eck Associates (Van Eck) US$ 1.75m in February 2024 for failing to disclose its use of a social media influencer in the launch of its new exchange-traded fund (ETF). According to the SEC, in March 2021, Van Eck launched VanEck Social Sentiment ETF to track an index based on positive insights from social media and other data. The provider of the index informed Van Eck that it would be using a social media influencer – Dave Portnoy – to promote the index in connection with the launch of the ETF. Dave Portnoy is a controversial social media figure and founder of sports blog, Barstool Sports. He is known for his outspoken misogynistic views and has been accused by several people of sexual misconduct and threatening behaviour. To incentivise Portnoy’s marketing and promotion efforts, the proposed licensing fee structure included a sliding scale linked to the size of the fund so, as the fund grew, the index provider would receive a greater percentage of the management fee the fund paid to Van Eck. However, as the SEC’s order finds, Van Eck failed to disclose the influencer’s planned involvement and the sliding scale fee structure to the ETF’s board in connection with its approval of the fund launch and of the management fee. “Fund boards rely on advisers to provide accurate disclosures, especially when involving issues that can impact the advisory contract, known as the 15(c) process,” said Andrew Dean, Co-Chief of the SEC Enforcement Division’s Asset Management Unit. “Van Eck Associates’ disclosure failures concerning this high-profile fund launch limited the board’s ability to consider the economic impact of the licensing arrangement and the involvement of a prominent social media influencer as it evaluated Van Eck Associates’ advisory contract for the fund.” The SEC action is part of a wider initiative by the regulator to crack down on celebrities and influencers who promote or influence the price of financial products and cryptocurrencies. The SEC’s order does not name Portnoy but refers to a “well-known and controversial social media influencer.” Source: SEC. |
Social media monitoring
According to a Reuters report in January 2024, the European Central Bank (ECB) has asked some of its regulated firms to monitor social media chatter for signs of bank runs. “In response to the ECB’s requests which were specific to certain banks in the region, a major European lender has arranged for a team to signal significant volumes of negative posts to the bank’s treasury, which will in turn assess any impact on deposits,” said Reuters.
Japan’s Financial Services Regulator has also reportedly said it will carry out a stress test on 20 banks by the end of June 2024 to determine how they would fare in a social media-triggered run on deposits.
Many banks and other large corporations are already deploying AI-based programmes to trawl the web and keep track of social media chatter that may pose risks to reputation or impact share prices. This then allows firms to address the issues in a timely manner – or at least be prepared for a potential crisis. It is important that firms invest appropriately in this area and that it isn’t treated as an afterthought in risk assessments.
Social media monitoring for banks works in the following ways:
- Data collection: Programs gather data from a wide range of social media platforms such as X, Facebook, Instagram, LinkedIn, etc. They track mentions of the bank’s name, specific products or services, key executives and relevant industry terms.
- Keyword filtering: The monitoring software uses predefined keywords and phrases related to banking, finance, and the bank’s specific operations. These keywords could include terms like “bank run,” “financial crisis,” “account closure,” or any other relevant phrases that could indicate potential risks or issues.
- Sentiment analysis: Advanced algorithms analyse the tone and sentiment of social media posts mentioning the bank. They determine whether the sentiment is positive, negative, or neutral. This helps banks gauge public perception and identify potential reputation risks.
- Real-time alerts: When the monitoring system detects relevant mentions or trends, it generates real-time alerts for bank officials or designated personnel. These alerts can be customised based on the severity or urgency of the situation.
- Risk assessment: Social media monitoring programs help banks assess potential risks to their reputation, operations, or financial stability. By analysing patterns and trends in social media discussions, banks can proactively address emerging issues and mitigate risks before they escalate.
- Response management: In case of negative sentiment or emerging threats, banks can use social media monitoring tools to formulate and implement response strategies. This could involve engaging with customers, issuing public statements, or taking corrective actions to address concerns and restore confidence.
- Compliance and regulatory reporting: Some social media monitoring programs for banks also offer features to ensure compliance with regulatory requirements. They may provide tools for archiving social media data, generating compliance reports, and documenting actions taken in response to social media events.
Liquidity rules: in need of an overhaul?
Overall, social media monitoring programs play a crucial role in helping banks to stay informed about public sentiment, identify emerging risks and to manage their reputation effectively in the digital age. But ultimately, if news begins to spread that there may be financial problems at a bank, it needs funds to survive. The Financial Stability Board confirmed in January 2024 that financial regulators will present their findings from a “deep dive” initiative on the impact of social media on bank deposit outflows, to the G20 in October 2024. This will help decide whether changes to liquidity rules are needed. “We haven’t yet set out policy options for any of this, but having said that, we are in favour of boosting the resilience of the financial system, and things like liquidity buffers are one of the options to boost that resilience,” said FSB Secretary General John Schindler. The Basel Committee (which is a member of the FSB) has confirmed it is looking at reforming its two core liquidity rules for banks covering 30 days and 12 months, and will also be contributing to the FSB report in October.
View the PDF version of this report, here.
