Regulators blame social media for SVB’s rapid collapse: ‘Complete game changer’


Silicon Valley Bank’s (SIVB) stunning collapse has brought a new element to the conversation about what role management, regulators, and investors may have played in the bank’s ultimate failure — the role of social media.

A modern wrinkle in what was in many ways a classic bank failure spurred by a run on the bank, and a management team Federal Reserve Chair Jerome Powell said last week “failed badly” in the years leading up to the firm’s demise.

“SVB’s failure is a textbook case of mismanagement,” Michael Barr, the Federal Reserve’s vice chair for supervision, said in testimony delivered Tuesday. “The bank had a concentrated business model, serving the technology and venture capital sector.”

Still, modern communication dynamics, in Barr’s view, sit at the heart of what brought down Silicon Valley Bank with such great speed.

On March 9, depositors scrambled to pull out more than the $40 billion from SVB as panic spread throughout Twitter, along with other social media platforms like Slack and WhatsApp, after the bank revealed a $1.8 billion loss within its bond portfolio and plans to raise more than $2 billion in new capital.

“In response, social media saw a surge in talk about a run, and uninsured depositors acted quickly to flee,” Barr said.

Federal Reserve Board Vice Chair for Supervision Michael S. Barr testifies at a Senate Banking, Housing and Urban Affairs Committee hearing on

Federal Reserve Board Vice Chair for Supervision Michael S. Barr testifies at a Senate Banking, Housing and Urban Affairs Committee hearing on “Recent Bank Failures and the Federal Regulatory Response” on Capitol Hill in Washington, U.S., March 28, 2023. REUTERS/Evelyn Hockstein

“On Thursday evening and Friday morning, the bank communicated that they expected even greater outflows that day,” Barr added. “The bank did not have enough cash or collateral to meet those extraordinary and rapid outflows, and on Friday, March 10, SVB failed.

“Panic prevailed among SVB’s remaining depositors, who saw their savings at risk and their businesses in danger of missing payroll because of the bank’s failure.”

Martin Gruenberg, FDIC chair, echoed Barr’s view in his respective Senate Banking testimony on Tuesday, saying: “One clear takeaway from recent events is that heavy reliance on uninsured deposits creates liquidity risks that are extremely difficult to manage, particularly in today’s environment where money can flow out of institutions with incredible speed in response to news amplified through social media channels.”

Speaking in an interview at the Economic Club of Washington last week, Citigroup CEO Jane Fraser said social media and mobile banking was a “complete game changer” in SVB’s demise.

“It’s a complete game changer from what we’ve seen before,” she said. “There were a couple of tweets and then this thing went down much faster than has happened in history. And frankly I think the regulators did a good job in responding very quickly because normally you have longer to respond to this.”

Coupled with social media, digital banking advancements — like self-service money management tools — have allowed the transfer of money and information at the fastest pace ever seen, adding to systemic risks as financial institutions adapt to a digital-first era.

In a press conference last week, Powell suggested more structural changes are needed as regulators search for ways to contain these new inherent risks to the banking system.

“The speed of the run…is very different from what we’ve seen in the past,” Powell said. “And it does kind of suggest that there’s a need for possible regulatory and supervisory changes, just because supervision and regulation need to keep up with what’s happening in the world.”

Fed chair Jerome Powell suggested more structural changes are needed in the face of Silicon Valley Bank's stunning demise.

Fed chair Jerome Powell suggested more structural changes are needed in the face of Silicon Valley Bank’s stunning demise.

The Fed is expected to release a complete review of SVB’s failing on May 1, which should offer more clarity on potential regulatory responses. In the meantime, industry watchers say banks need to recalibrate risk management priorities and consider social media as a top threat.

“[Regulators] need to be looking for any signs of unsubstantiated rumors, panic starting to mount on social media, and they’ve got to do it around the clock,” Patricia McCoy, a law professor at Boston College, told Reuters.

Bradley Mirkin, a managing director at Berkeley Research Group, added in an interview with Bloomberg Law that banks should make social media strategies part of their stress testing procedures — especially in the face of deep fakes, artificial intelligence and the rise of ChatGPT.

“If you could put Jamie Dimon through a deep fake, there’s a very real chance that you would just have a cataclysmic response,” he warned.

Alexandra is a Senior Reporter at Yahoo Finance. Follow her on Twitter @alliecanal8193 and email her at alexandra.canal@yahoofinance.com

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2023-03-28 17:36:15