May 23rd, 2023 7:00am PDT
(PenniesToSave.com) – Banks are enhancing their risk management, monitoring, and emergency protocols in response to the use of social media. This comes after an incident where Silicon Valley Bank faced significant disruption caused by an internet frenzy. To prevent similar situations, banks are taking proactive measures.
Banking industry executives and analysts have been actively developing strategies and initiatives to address potential online threats. These threats include rumors about the financial health of banks, which can result in deposit outflows or negative impacts on stock performance. This proactive approach is being taken in boardrooms throughout the United States to ensure preparedness and resilience in the face of emerging challenges.
Banks are working harder to adapt to the changing landscape and avoid potential problems like mass withdrawals by panicked depositors or targeted attacks on their stocks by short sellers. These previously undisclosed efforts demonstrate that banks understand the importance of addressing the challenges brought about by shifting times.
Banks are reevaluating the role of social media in light of incidents where tweets questioning the financial stability of SVB led to anxious customers withdrawing funds rapidly. Instead of solely considering it as a marketing tool, banks now see social media as a potential risk factor.
Until recently, the risks of social media for banks were primarily related to their reputation. However, recent events have highlighted that these risks can now also lead to potential deposit flight and pose significant threats to the existence of banks. Sumeet Chabria, the founder of ThoughtLinks—an advisory firm specializing in banking—has emphasized this shift in perspective.
During his testimony in front of the Senate Banking Committee, Greg Becker, the former CEO of Silicon Valley Bank, highlighted the immense influence of social media as the primary cause for the bank’s collapse. In just 10 hours, depositors withdrew an astonishing $42 billion from SVB, leading to its swift downfall.
The abrupt and significant decline of SVB left the markets stunned. On March 8, the bank made an announcement to sell securities and raise capital, which raised concerns about its financial stability. This triggered a chain of events, as clients in the Bay Area tech industry expressed their worries through social media posts and subsequently withdrew funds using mobile apps and online banking platforms.
Social media was identified as a key factor in the collapse of First Republic Bank, according to Michael Roffler, the former CEO. The bank’s downfall came two months after this assessment.
The recent series of alarming events has prompted smaller lenders to reevaluate and strengthen their emergency response protocols, risk management capabilities, and business continuity plans. These proactive steps are intended to effectively address the potential threats posed by social media. Sumeet Chabria, founder of ThoughtLinks, underscored the importance of such measures given the continuously evolving landscape.
According to confidential sources from regional bank executives, top-level bank executives and directors are incorporating social media into their risk management initiatives. These individuals, who wish to remain anonymous due to the private nature of the discussions, have provided valuable insights about this strategic shift.
Risk departments in banks have been actively working on creating thorough plans to measure, prepare for, and respond to internet-related risks. One executive highlighted the involvement of risk departments in developing a detailed framework that allows banks to evaluate, be ready for, and tackle the challenges that come with social media platforms.
“We Want to Nip It in the Bud”
Banks have taken steps to address customer complaints raised on social media platforms quickly and efficiently, in order to provide timely resolution to any issues.
“Our goal is to address concerns at the earliest stage,” stated the second executive.
According to Greg Hertrich, the head of U.S. depository strategies at Nomura, the incidents observed at SVB could easily happen at other banks as well. Failing to consider the influence of social media on deposit behavior would not only negatively impact banks and their stakeholders but, more importantly, it would harm their depositors as well.
According to Lindsey Johnson, CEO of the Consumer Bankers Association, smaller lenders are actively working to identify their depositors and utilize influential community members to address any misinformation. The association, whose members collectively hold about $15.1 trillion in assets, approximately 68% of the total in the U.S., emphasizes that many banks are taking a proactive approach by effectively communicating with their customers. This includes providing accurate information and resources through various channels like email, Twitter, and LinkedIn.
Major banks have also acknowledged the importance of social media. JPMorgan Chase & Co CEO Jamie Dimon openly acknowledged the significant impact that social media had on SVB’s downfall. Similarly, Citigroup Inc CEO Jane Fraser took it a step further and described social media as a transformative force that has completely changed the financial landscape dynamics.
The failures of SVB and Signature banks have caused people to lose faith in regional financial institutions, resulting in a significant drop in First Republic’s stock value. Although First Republic tried to restore confidence by sharing customer testimonials on LinkedIn and receiving a $30 billion deposit support from 11 major lenders, these efforts couldn’t prevent its decline. Consequently, regulators took control of the bank, which was later acquired by JPMorgan.
Regulatory agencies like the U.S. Federal Deposit Insurance Corporation and Federal Reserve are closely watching how technology, specifically social media, affects bank runs. Additionally, the Financial Stability Board, a global institution, is conducting a thorough investigation into the role of social media in the recent turmoil seen in financial markets.
Although some banks have implemented strategies to tackle these challenges, others are still grappling with them, as emphasized by analyst Jim Perry. Many banks acknowledge the risks involved but often allocate social media monitoring responsibilities to small marketing teams or third-party vendors. Nevertheless, there is a growing realization that dedicating more human resources to social media monitoring is imperative, even though it may not be a top priority for many smaller lenders, according to Perry.