Social word of mouth worries bankers: “It risks triggering bank runs”

Between March 8 and 13, 16,190 users posted tweets with the hashtag #Svb or #Sivb and containing words such as “bank run”, “withdrawals” and “contagion”. The subject was none other than the notorious Silicon Valley Bank, protagonist in those five days of the second largest bank failure in the history of the United States.

What role did word of mouth play in the collapse of the Californian institute first and then of Credit Suisse? And especially Instagram, Twitter, Facebook and TikTok could accelerate or even cause more crashes? In the aftermath of the Svb case, many began to wonder, as did the banking supervisory authorities.

“There is no denying that the rate at which deposits were withdrawn from Silicon Valley Bank was much faster than expected, much faster than accounting for Liquidity Coverage Ratio (LCR) calculations,” Klaas noted recently. Knot, governor of the Dutch central bank.

The so-called short-term indicator (LCR) aims to ensure that each bank maintains sufficient liquidity to cope with any unexpected spikes in customer withdrawals. However, the parameter was set when social networks were not yet able to influence public opinion and the market so quickly and profoundly.

Today information travels in a second from one part of the world to another, without any filter or accuracy check. One click is all it takes to move money from one account to another. Thus, within hours, a breach in trust can turn into a wave of withdrawals that can engulf a bank.

«So should the Lcr index be calibrated differently? And/or do we need to stress test it more with the times?” Knot asked. A question repeated in the same hours by the president of the French central bank, Francois Villeroy de Galhau, who called for the debate on the opportunity to change the liquidity rules in the light of the impact of social media on deposit movements.

Through two of its influential members, the discussion could reach the ECB, the authority responsible for supervising the soundness of European institutions. Of course, changing the liquidity parameters would aggravate the already onerous regulatory burden on banks. On the other hand, the case of Silicon Valley Bank has led the authorities to reflect again on the regulation of bank failures 15 years after the Lehman crash.

The collapse of SVB in March and the more recent torments of First Republic Bank are prompting a rethinking of the concept of “systemic bank” both in the United States and in the European Union. At the moment, resolution procedures in the EU are reserved for large institutions whose failure, in the absence of an orderly restructuring, would threaten the overall financial stability of the eurozone. Their rescue is therefore in the public interest which, on the other hand, does not exist for medium-small banks, free to fail.

However, the distinction risks proving to be useless in practice. The doubt is that all (or almost) the banks are too big to fail in the light of the speed of propagation among the public of fears of contagion which risk undermining confidence in the entire banking system. Just think of the broken reactions of the Stock Exchanges to the collapses of Svb and Credit Suisse.

«The second priority», concluded the French governor Villeroy, «is to move from the resolution “for the few” – precisely for the too few: two cases in the last 9 years – to the resolution “for many”, including small and medium-sized banks» .

The EU Commission has been working on this point for some time and a few days ago presented a proposal to reform the crisis management mechanisms of European banks. The idea is to extend the resolution procedures, currently envisaged for institutions of national importance, also to medium-small banks of regional importance. The proposal also attributes a greater role to deposit protection funds which will be able to intervene in crises to prevent customer accounts from being affected, even those over the guarantee threshold of 100 thousand euros.