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Bank runs have been part of the banking industry for a long time. This is an unintended consequence of the fractional reserve banking system which is followed by the banking industry across the globe.
Bank runs were common during the 1920s when the Great Depression took place. However, with the passage of time, the banking industry learned to act as a single unit. This helped them mitigate the risk of bank runs. With the passage of time, bank runs became fewer and far apart. As a result, the regulators became more confident about their ability to manage the bank run.
However, Silicon Valley Bank has changed that equation. The confidence of the regulators has been shattered since they have come across a new phenomenon i.e. a social media-driven bank run. The Silicon Valley Bank is the first significant bank run since social media has taken root in the economy.
In this article, we will have a closer look at why the role of social media is significant in the Silicon Valley Bank and what are the measures that banks and regulators need to undertake in order to manage the situation better.
It is important to realize that the Silicon Valley Bank disaster is probably the first bank run that has taken place in this era of social media. Social media is a tool used by people for spreading information. In this case, information about the failure of the Silicon Valley Bank was spread at a drastic speed by social media.
Silicon Valley Bank had publicly disclosed that it has incurred a loss of $1.8 billion and was planning to raise $2 billion. This news spread like wildfire on social media and the social media influencers who had millions of followers started spreading this content. The end result was that the bank run took place at an alarming pace! Within 48 hours, the Silicon Valley Bank was completely wiped out. Also, the magnitude of deposits pulled out of the bank was very high at 25%.
The last bank run which happened in 2008 at the Washington Mutual bank led to 18% of deposits being pulled out. That happened over a larger number of days and was in the middle of a full-fledged economic meltdown. The Silicon Valley Bank case has shown that social media can almost double the speed and impact of a bank run. It is for this reason that American regulators have called it the world’s first Twitter fuelled bank run.
The Silicon Valley Bank fiasco has highlighted the importance of social media in the banking industry. Prima facie, it might seem like social media is a tool for individuals. However, this case has shown that banks may also need to use social media tools to engage with their audience.
In traditional media, the user is not prompted to view the information. However, in social media, when a financial influencer shares content, the followers receive notifications and are prompted to consume the information. Traditional media follows a one-to-many business model. However, social media follows a many-to-many model. Hence, the speed at which the information is spread is much faster.
In social media, a person can also view the comments section of the post. They can also see how often a particular post has been retweeted for instance. This gives them social validation about whether or not the content in the message has been accepted by a wider audience.
Banks cannot and should not trivialize the impact of social media. It is a powerful tool that can create a significant impact on the overall media. Banks need to use social media as a tool to give well-thought-out and strategized replies.
If suddenly a very large number of negative tweets are happening against a bank, it is likely to face a bank run. If the bank is able to understand the general sentiment at the correct time, they can take corrective actions and prevent the failure of the bank.
Banks can present their point of view in a timely and transparent manner. This will help pacify at least some of the participants. The end result would be that the spread of information as well as the actions taken on its basis will slow down.
The fact of the matter is that social media did play a huge role in the collapse of Silicon Valley Bank. It is important for banks and regulators to draw important economic lessons from this incident in order to ensure that it does not get repeated again.
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