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Have Banking Apps and Twitter Really Changed Bank Runs?
Some pushback on the increasingly popular narrative
News reports following the recent bank collapses have often attributed the speed to negative social media activity and the relatively new prevalence of digital banking. Regulators’ statements and testimonies then shared similar assessments, citing those articles—if anything. Reports and investigations that have followed those statements have reinforced this narrative—citing…those statements and articles (and, to be sure, that one academic paper).
It’s of course true that banking apps and social media are pervasive today in a way they weren’t in even relatively recent history. Their possible role in crisis dynamics should not be ignored, regardless of the role played recently. Yet, it’s also not abundantly clear that they are materially changing/impacting the nature of bank runs, in contrast to the growing narrative among regulators and Congress.
Below are some assorted comments that that narrative has to contend with before public officials should ascribe to it:
The banks that have failed in the last two months were not random; they were not purely victims of rumor and trigger-happy app users. While social media indeed swirled in advance of their failures, Credit Suisse has been messing up on the front page for years, SVB announced client cash burn and an emergency fundraising, and Silvergate and Signature bet the business on catering to crypto—and had been increasingly fragile since FTX’s unraveling last year. It’s not as if Elon tweeted something and took down Morgan Stanley. And despite having a fully functional app, JPMorgan experienced deposit inflows.
The point of a bank run is to be first, not to have backup. Your incentive as a runner—whether retail or institutional—is not to broadcast it. As the Wall Street Journal reported on SVB: “Some [VCs] debated if they should wait to warn startups to buy themselves more time to move their own, much bigger, balances.”
Broadcasting it as a retail depositor was unavoidable in the pre-app days: you were either in line at the bank or you weren’t. Yes, someone who’s already “out” or who has nothing at risk can go on Twitter and shout to run, but famous short-sellers do this kind of shouting all the time and often fail. If this “works,” it likely means the run is already on. Plus, a Twitter announcement is likely just playing for the marginal effect of retail runners (more on them below); Twitter likely offers much less on the institutional side than would a note to clients or a quote on the business wires.
The academic paper being regularly cited is one showing that Twitter activity didn’t just follow SVB’s stock price in its final day, but actually contributed to its plunge.1 Moreover, it shows that for other banks, pre-existing social media pervasiveness meant a steeper stock dip once the SVB run began. This is important, no doubt!2 And is similar to the lesson we learned with GameStop.
But the spark for the run was SVB’s emergency 8K filing on March 8. After that, the stock price nosedived and took deposits with it. That other banks relatively pervasive on social media also saw more of a selloff is interesting to a degree, but this was already a run on the banks of the (economically wounded) tech sector—so the greater social media exposure might be expected. It’s still only those banks with strong resemblances to SVB (inclusive of the crypto-y Signature in NY) that have gotten swept up. Sure, we have the benefit of hindsight and there’s a counterfactual story to tell (down goes Schwab!)—but again, it’s not as if Twitter spread the SVB contagion to Wall Street.
We should also keep in mind that analysis of Twitter sentiment works because we have the data. We don’t have the data of what got said back and forth across Wall Street in Bloomberg Terminal chats or other institutional communication channels. Indeed, Bloomberg News reported on a similar, West Coast version of these chats playing out in the case of SVB. The genesis of the run on SVB was among a highly networked group of sophisticated investors, not Twitter:
Channels like messaging platform WhatsApp, email chains, texts and other closed forums were full of chatter over the bank’s financial precarity well before those fears showed up Twitter. In tech, where executives’ networks can dictate whether companies have access to the best information, warnings about SVB had been simmering for a while when they boiled over into wider view online.
By the time most people figured out that a bank run was a possibility on Thursday, March 9, it was already well underway.
Modern bank runs have long been institutional, not retail—basically since the introduction of deposit insurance after the Great Depression. Retail activity, while headline-grabbing, is mostly a sideshow at the macro level. Remember the runs of 2008 (and the inklings of runs in 2020): repo, commercial paper, prime brokerage—not mom-and-pop products. So, it’s not clear how much the game is really changed by the onset of digital apps. Corporate treasurers don’t need Venmo if they have a landline. And Fidelity can call Bank of New York and tell it not to roll someone’s repos faster than my bank app login can FaceID my panic face.
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There’s another interesting paper on the slower moving “bank walks” in response to changing interest rates and digital apps’ role. This is a wholly separate issue from the issue of bank runs: The ease of an app may be what prompts you to chase down that extra 50 basis points, but the clunkiness or lack of an app is unlikely to be that much of a deterrent when you perceive your deposits at risk. Moreover, as emphasized throughout the note, the relative role of retail depositors in bank runs is small versus institutional ones.
Generally, there still seems to be an underappreciation for the importance of bank stock prices. The “punish the shareholders” mantra is mostly right…but not always right. Particularly when it becomes necessary to steady/raise capital levels in the banking system. Nevertheless, it seems unlikely the Twitter effect mattered much at the margin for SVB’s final day. Moreover, it’s not clear how much of an effect retail pressure and twitter sentiment algo pressure on stock prices can really have on market solvency. Sure, they can short-squeeze on a fringe stock, but can they squeeze the institutional market from a long position/conviction?