SVB collapse, banking crisis caused by social media fuel: Research

By Ovunc Kutlu

ISTANBUL (AA) - The sudden demise of SVB and the recent banking crisis in the US are caused by "fuel" in a social media platform, argued a research published Monday.

"Social media fueled a bank run on Silicon Valley Bank (SVB), and the effects were felt broadly in the U.S. banking industry," said the paper titled 'Social Media as a Bank Run Catalyst' authored by five professors in the US and Europe.

"We employ comprehensive Twitter data to show that preexisting exposure to social media predicts bank stock market losses in the run period even after controlling for bank characteristics related to run risk ... we show that social media amplifies these bank run risk factors," said the paper's abstract.

The authors argued that they found Twitter conversation about a bank predicts stock market losses at an hourly frequency, which in effect "is stronger for banks with bank run risk factors," adding "tweets in the run period with negative sentiment translate into immediate stock market losses."

Consequently, high frequency effects are stronger when tweets are authored by members of the Twitter startup community, who are likely depositors, and contain keywords related to contagion, according to authors who stressed that "results are consistent with depositors using Twitter to communicate in real time during the bank run."

A bank run is defined as when a high number of customers rush to withdraw their deposits from a bank since they receive the institution could fail.

SVB announced earlier this month it sold its $21 billion bond portfolio at a $1.8 billion loss. After the bank was quickly closed by US regulators, First Citizens Bank agreed to buy SVB's deposits and loans, approximately $72 billion of its assets at a discount of $16.5 billion.

In addition to the collapse of SVB and Signature Bank, financial difficulties in March surrounded Silvergate Bank and First Republic Bank.

"The amplification of bank run risk via Twitter conversations is a unique opportunity to observe communication and coordination that shapes a critically important economic outcome − distress in banks," said the paper.

"Given the increasingly pervasive nature of social communication on and off Twitter, we do not expect this risk to go away, but rather, it is likely to influence other outcomes, as well," it added.