Research shows that social networks work in Silicon Valley banks

According to a 53-page report released last week by a group of university professors, social media fueled the Silicon Valley banking scandal that rocked the entire US banking industry.

The boffins used Twitter data in their research to show a significant increase in public communication on Twitter by well-known depositors who used the forum to discuss the issues facing the bank before SVB’s failure. faced and, more importantly, about their intention to withdraw their deposits from SVB.

As the researchers have argued, the transparency and speed of this coordination in banking is unprecedented.

Mark T. Williams, professor of finance at Boston University’s Questrom School of Business, explained that before the advent of social media, banking occurred when people connected through much slower methods of communication. , such as by mail, telephone or verbally. .

“The impact of influencer tweets on the speed and volume of SVB Bank shows how much social media has accelerated the speed and reach of communication,” he told TechNewsWorld.

“SVB failed due to poor risk management and the crypto contagion that spread throughout the industry,” he continued. “What Twitter has done is accelerate the process of failure.”

“It’s dangerous when influencers can reach so many people so quickly,” he said. “They can change the price of a stock or the value and stability of a company.”

“But Twitter didn’t cause SVB to fail,” he added. “This was caused by SVB. Twitter emphasized this.

Single risk channel

The social media race in SVB will have a significant impact on the banking industry, say researchers – University of Colorado-Boulder J. Anthony Cookson, Corbin Fox of James Madison University, Javier Gil-Bazo of Pompeu Fabra University, Juan F. Imbet from Paris Dauphin University and Christophe Schiller from Arizona State University,

Silicon Valley banks face a new channel of racial risk in the age of social media, researchers note.

“SVB depositors who are active on social media played a crucial role in the bank’s performance,” the researchers wrote. “These investors were concentrated and closely connected through the venture capital industry and founder networks on Twitter, exacerbating other banking risks.”

More importantly, they continued, SVB is not the only bank facing this new channel of risk: the open communication of depositors through social media has increased the operational risk of banks for other banks exposed to similar discussions on social media.

“When information spreads faster, people can run faster on the bank,” noted Will Duffield, a policy analyst at the Cato Institute, a think tank in Washington.

Trying to regulate this information is not a good solution to this problem, he added.

“You want efficient markets. You want people to share health information from different companies,” he told TechNewsWorld. “I don’t see that the First Amendment supports regulation.”

Social media is allowed

Neither can social media platform operators solve the problem, Duffield noted.

“I don’t think social media is capable of making those kinds of calls,” he said. “If you’re Twitter, you don’t know if a bank is solvent or not. You can’t look at their experience.

“You can remove any claims that the bank is insolvent,” he continued, “but then you can prevent a lot of people from knowing that the bank really is insolvent and they should be trying to get their money out of it.” .”

“When a poem goes viral, social media cannot verify its authenticity,” he added.

Cookson agreed. “Social media can’t do much,” he told TechNewsWorld.

“I don’t see our article as a call to action on the social media side, because there seem to be no limits to what users can post or communication breaks, even when it comes to real-world effects. important,” he explained.

“I don’t think social media can be regulated,” added Vincent Reynold, assistant professor of communication studies at Emerson College in Boston.

“Any attempt to do so is a violation of a person’s right to self-expression,” he told TechNewsWorld.

Dangerous groups

Mark N., president and chief analyst at SmartTech Research in San Jose, California. Vienna acknowledged that the market has vulnerabilities when social media posts go awry, causing banks to fail or even sending stocks higher. up or down.

However, since social media posts are a form of communication, he doubted that “public” posts could be regulated in any meaningful way to prevent these activities.

“I’ve seen that company officials and stockholders are prohibited from publishing insider communications, but current laws and regulations regulate this and there are serious legal consequences for people. who discloses inside information,” he told TechNewsWorld.

“The danger is if the people in the group come together to create and promote messages that have a collective effect, rather than the people in the group sending the messages,” he said. he declares.

“If the information is deliberately misleading to distort the market, if someone can use it, there may be an opportunity for regulatory action,” he added.

Absence of White-Knuckling banking

Cookson noted that while banking regulators have not acted to curb the accelerating impact of social media on banking operations, banks can do more to reduce the risk of their deposits leaking.

“Our finding is that social media amplifies existing banking risks, such as a high percentage of uninsured deposits, so one big change we’re seeing is banks starting to carefully manage their deposit risks, as social media and digital banking do. “It is more dangerous to rely on uninsured deposits,” he said.

Duffield said the Federal Reserve’s bailout processes could be improved. For example, he noted that although companies operate in a world of real-time global money transfers, there is a 16-hour limit on money transfers each day.

“Lenders of last resort in our system need to think carefully about how they can move faster to keep up with the digital world,” he said. “These mechanisms may have worked well in the 1970s and 1980s, when everyone stopped doing business at 4 p.m., but now things are moving faster.”

“It’s all a big loophole,” he added. “There’s just a speed lag between the borrowing side and the lending side.”

Another lesson learned from the SVB failure is the difference between East Coast and West Coast banking cultures.

“The culture of the West Coast capital is young,” Duffield said. “A lot of what we saw in Silicon Valley banking was the downside of that. There is no preconceived belief. When the situation seemed dire, everyone ran for the exit, not the passage.