The stunning collapse of Silicon Valley Bank (SIVB) has brought a new element to the discussion 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 bank run, and Jerome Powell, chairman of the Federal Reserve’s management team, said last week that in the years leading up to the collapse of the company had “failed badly”.
“The SVB’s failure is a textbook case of mismanagement,” Michael Barr, the Federal Reserve’s vice chairman for oversight, said in testimony Tuesday. “The bank had a concentrated business model and served the technology and venture capital sectors.”
Still, according to Barr, modern communications dynamics are at the heart of what has brought down the Silicon Valley bank with such rapidity.
On March 9, depositors scramble to withdraw more than $40 billion from SVB amid panic spread on Twitter and other social media platforms like Slack and WhatsApp after the bank posted a $1.8 billion loss -dollars in its bond portfolio and plans to raise more than $2 billion in new capital.
“In response, there was increasing talk of a run on social media and uninsured depositors acted quickly to flee,” Barr said.
Michael S. Barr, Vice Chairman of the Federal Reserve Board for Oversight, testifies at a Senate Committee on Banking, Housing and Urban Affairs hearing on “Recent Bank Failures and the Federal Regulatory Response” on Capitol Hill in Washington, U.S., April 28. March 2023. Portal/Evelyn Hockstein
“On Thursday evening and Friday morning, the bank said it expects even larger outflows that day,” Barr added. “The bank did not have enough cash or collateral to handle these extraordinary and rapid outflows and on Friday 10 March SVB failed.
“There was panic among SVB’s remaining depositors, who saw their savings at risk and their businesses at risk of losing their payroll due to the bank’s collapse.”
Martin Gruenberg, Chairman of the FDIC, echoed Barr’s view in his respective testimony before the Senate Banking Tuesday, saying, “One clear lesson 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 at incredible speeds in response to news amplified by social media channels.”
The story goes on
Citigroup CEO Jane Fraser said in an interview with the Economic Club of Washington last week that social media and mobile banking were 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 few tweets and then this thing went down a lot faster than it historically happened. And honestly I think the regulators did a good job reacting very quickly because you usually have longer to react to that.”
Coupled with social media, digital banking advances — like self-service money management tools — have enabled the transfer of money and information at the fastest speeds ever, creating systemic risk as financial institutions adapt to an era of digitization.
In a press conference last week, Powell proposed further structural changes as regulators look 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 kind of suggests that just because oversight and regulation have to keep up with what’s happening in the world, possible regulatory and oversight changes are needed.”
Fed Chair Jerome Powell suggested that more structural changes were needed in light of Silicon Valley Bank’s stunning demise.
The Fed is expected to release a full review of the SVB failure on May 1, which should provide more clarity on potential regulatory responses. Meanwhile, industry watchers say banks need to recalibrate risk management priorities and view social media as the top threat
“[Regulators] need to look for signs of unfounded rumours, panic is starting to spread on social media and they need to do this 24/7,” Patricia McCoy, a law professor at Boston College, told Portal.
Bradley Mirkin, managing director of 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 light of deepfakes, artificial intelligence and the rise of ChatGPT.
“If you could subject Jamie Dimon to deep forgery, there’s a very real chance you’d just get a catastrophic reaction,” he warned.
Alexandra is a Senior Reporter at Yahoo Finance. Follow her on Twitter @alliecanal8193 and email her at [email protected]
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