Supervisors blame social media for rapid SVB collapse: ‘Complete game changer’

The stunning collapse of Silicon Valley Bank (SIVB) has added a new element to the conversation about what role management, regulators and investors may have played in the bank’s eventual failure: the role of social media.

A modern wrinkle in what was in many ways a classic bank failure, spurred by a bank run, Jerome Powell, chairman of the Federal Reserve’s management team, said last week “failed badly” in the years leading up to the demise of the Federal Reserve. company.

“The failure of the SVB is a textbook example of mismanagement,” said Michael Barr, the Federal Reserve’s vice chairman of oversight, in testimony given Tuesday. “The bank had a concentrated business model, serving the technology and venture capital industries.”

Yet modern communication dynamics, according to Barr, are at the heart of what has brought down Silicon Valley Bank at such great speed.

On March 9, depositors rushed to withdraw more than $40 billion from SVB as panic spread across Twitter, along with other social media platforms like Slack and WhatsApp, after the bank revealed a $1.8 billion loss in its bond portfolio and had plans to raise more than $2 billion in new capital.

“In response, social media saw a flurry of rumors of a run, and uninsured savers quickly responded to flee,” Barr said.

Michael S. Barr, Vice Chairman of the Board of Governors of the Federal Reserve, testifies at a Senate Banking, Housing and Urban Affairs Committee hearing on “Recent Bank Failures and the Federal Regulatory Response” on Capitol Hill in Washington, US, March 28 2023. REUTERS/Evelyn Hockstein

“Thursday evening and Friday morning, the bank communicated that it expected even greater outflows that day,” Barr added. “The bank didn’t have enough cash or collateral to handle that extraordinary and rapid outflow, and on Friday, March 10, the SVB failed.

“There was panic among the remaining depositors of the SVB, who saw their savings in jeopardy and their companies threatened to miss payroll due to the bankruptcy of the bank.”

Martin Gruenberg, chairman of the FDIC, echoed Barr’s view in his respective Senate Banking testimony on Tuesday, saying, “A clear takeaway from recent events is that heavy reliance on uninsured deposits creates liquidity risks that are extremely difficult to manage, especially in the current environment where money can flow out of institutions at incredible speed in response to news amplified through social media channels.”

Citigroup CEO Jane Fraser said in an interview last week at the Economic Club of Washington 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 went down much faster than it has in history. And frankly I think the regulators did a good job of reacting really quickly because normally you have longer time to react to this to respond.”

Coupled with social media, developments in digital banking, such as self-service money management tools, have enabled the transfer of money and information at the fastest pace ever, adding to systemic risk as financial institutions adapt to a digital-first era.

At a news conference last week, Powell suggested more structural changes are needed as regulators look for ways to mitigate 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 there’s a need for potential regulatory and oversight changes just because oversight and regulation has to keep up with what’s happening in the world.”

Fed Chairman Jerome Powell suggested more structural changes are needed in light of Silicon Valley Bank's stunning demise.

Fed Chairman Jerome Powell suggested more structural changes are needed in light of Silicon Valley Bank’s stunning demise.

The Fed is expected to release a full review of the SVB’s bankruptcy on May 1, which should provide more clarity on possible regulatory responses. In the meantime, industry analysts say banks should rethink their risk management priorities and consider social media a major threat

“[Regulators] have to look for signs of baseless rumors, panic is starting to mount on social media, and they have to do it around the clock,” Patricia McCoy, a law professor at Boston College, told Reuters.

Bradley Mirkin, general manager at 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 put Jamie Dimon through a deep fake, there’s a very real chance you’d just have a disastrous reaction,” he warned.

Alexandra is a Senior Reporter at Yahoo Finance. Follow her on Twitter @alliecanal8193 and email her at

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