MSG Team's other articles

11856 What are Demergers: Its Pros and Cons

Mergers and acquisitions are often used by conglomerates to create value. However, in some cases, demergers have also been effectively used. While the workings of mergers and acquisitions are well known to many people, demerger is still considered somewhat of a mystery. In this article, we will have a closer look at what a demerger […]

11951 Why Devaluing the Currency is a Bad Idea?

The European economy is facing a significant downturn. There is a looming financial crisis in Europe which has been caused by excessive borrowing in the past. However, it is unlikely that this borrowing will stop in the near future. This is because the immigrant crisis in Europe is draining its resources making borrowing inevitable. In […]

12195 Stress Testing in Money Market Funds

From the previous articles, we already know that money markets form an integral part of the overall financial system. Also because of their large volumes and high ratio of demand deposits, the money market funds are always at the risk of a run. It is for this reason that the Securities and Exchange Commission has […]

11218 Secondary Revenue Streams in Retail

The retail sector has been in doldrums in the recent past. The entire industry is struggling financially. The financial troubles within the retail sector are indigenous. However, time and again, external shocks such as Covid-19 and Brexit exacerbate the financial trouble. The end result is a large wave of bankruptcies. These bankruptcies do not only […]

12467 Bielard, Biel and Kaiser (BBK) Model

The main criticism of the Barnewall model was that it only classified investors into two types. This created an oversimplification. Practitioners of behavioral finance wanted the classification to be more accurate and inclusive. This is the reason why they started creating another psychographic model. This model is called the Bielard, Biel, and Kaiser model, i.e., […]

Search with tags

  • No tags available.

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.

Twitter Fuelled Bank Run

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.

Why Social Media Risk is Important?

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.

  • Faster Speed: The Silicon Valley Bank run is notable because of the speed at which the events took place. Within 48 hours, a seemingly healthy bank went bust! This is because of the speed and velocity at which the information can be shared on social media.

    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.

  • Has a Wider Reach: In the modern world, social media has a much wider reach as compared to traditional media. There are many influencers who operate from all walks of life. These influencers have their own following i.e. people who tend to have the same set of beliefs. The end result is that when information goes viral on social media, it is likely to reach a much wider target audience within a shorter span of time.

  • Social Proof: Traditional media informs people about the facts of the matter. However, people are unable to see the reaction of a large number of their peers. This is not the case with social media.

    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.

  • Self-Fulfilling Prophecy: Last but not the least, social media can create self-fulfilling prophecies in the banking sector. Just like in the case of Silicon Valley Bank, social media influencers can spread negative news about the fall of a financial institution. This could trigger a bank run which could lead to an actual collapse in the market.

How Banks Can Manage Social Media?

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.

  • Aggregation Tools: It is important for banks to use social media aggregation tools. This will help them understand the general sentiment in the market about their banks. It will also help them understand the severity of the public response.

    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.

  • Timely and Transparent Response: Banks must have teams to engage with the audience showing negative traits on social media.

    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.

Article Written by

MSG Team

An insightful writer passionate about sharing expertise, trends, and tips, dedicated to inspiring and informing readers through engaging and thoughtful content.

Leave a reply

Your email address will not be published. Required fields are marked *

Related Articles

China’s Predatory Lending

MSG Team

Why Should Central Banks Be Independent?

MSG Team

Central Banking in the United States

MSG Team