Social media, a source of dodgy finfluencers and crypto scams, isn’t just a threat to retail investors but also poses a risk to the staid world of banking, representing a possible accelerant for bank runs, according to the Financial Stability Board (FSB).
In a new report, the FSB examines the liquidity crisis that gripped the banking system in March 2023, resulting in the failure of several U.S. banks and the forced marriage of Swiss banking giants UBS and Credit Suisse.
The group of global policymakers found that some of the affected banks experienced runs on their deposits that occurred with “unprecedented speed,” with banks seeing deposit outflows of 20% to 30% per day. That’s two to three times larger than the outflows observed in the past and multiples higher than the 1% per day average of previous bank runs.
Additionally, the median deposit outflow of these runs — 24% of pre-run deposits — was more than double the median of past deposit runs, which were around 10% of deposits.
In U.S. dollar terms, “the outflows from Credit Suisse and First Republic were greater in size than the largest historical deposit runs,” the report noted.
Several factors contributed to the unprecedented size and speed of these outflows, including the digitalization of banking, which made it much easier for depositors to pull their money, the report noted.
And the affected banks tended to have depositors that were concentrated by industry (the tech and crypto sectors) or by client type (high-net-worth investors), it said.
There is also “some evidence” that social media played a role in these bank runs, the report said. It noted that the run on Credit Suisse was associated with negative social media posts about the bank, and a large spike in social media traffic preceded the failure of one of the U.S. banks too.
While the clients at the centre of this activity — corporate accounts and wealthy individuals — likely had other sources of information that contributed to their deposit withdrawal decisions, the FSB concluded that social media could exacerbate future deposit runs by spreading information about a bank’s condition, including rumours or false information.
These findings have a range of implications for banks and regulators alike.
“The speed of the recent runs means that banks and authorities may need to be able to react much more quickly to deposit outflows than in the past; find ways to address the liquidity and solvency vulnerabilities that gave rise to such extreme outflows; and consider whether monitoring of social media could be helpful as an early warning tool to flag potential stress at a bank or wider turmoil that might affect banks,” the report said.
Given that deposit outflows can now happen much faster, the report suggested that “banks could be encouraged to prepare in advance for quick access to existing central bank liquidity facilities” in the face of a looming run on deposits.
In certain cases, “the speed and magnitude of deposit outflows was so extreme that no amount of bank liquidity would have prevented the failures,” the report concluded.
In response, it said that “deposit-related vulnerabilities metrics may need to be developed” to warn banks and regulators of emerging vulnerabilities and address them before they turn into crises.
Additionally, it suggested that policymakers should consider collecting and publishing information on bank deposits and on the unrealized losses in banks’ securities portfolios, to fill in some of the shortcomings in the data in these areas.
And it noted that regulators should be prepared to deal with the additional challenges to their ability to resolve a failing bank amid large, rapid deposit outflows.
“Since resolution timelines may be more compressed, authorities and banks should enhance operational readiness via, for example, ex-ante preparations and testing, with an emphasis on fast-fail scenarios,” it said.
“The potential for rapid spread of information, including through social media, also highlights the importance of incorporating effective communication strategies in banks’ resolvability capabilities and authorities’ preparations through communication networks among key stakeholders to ensure coordinated and consistent messaging,” it said.