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BULLPEN BRIEF: New Paper Analyzes the Risk of Social Media Activity to the Financial System

A new pre-print paper published by academics from universities in the United States, France, and Spain analyzes data from Twitter during this spring’s run on Silicon Valley Bank (SVB) to find “a novel channel of bank run risk that is unique to the social media era” – and that other financial institutions face similar risks going forward. From the paper:

“In this paper, we present evidence that social media did, indeed, contribute to the run on SVB. More importantly, our analysis suggests that other banks face similar risks. …

“One core insight is that SVB faced a novel channel of bank run risk that is unique to the social media era. SVB depositors active on social media played a central role in the bank run. These depositors were concentrated and highly networked through the venture capital industry and founder networks on Twitter, amplifying other bank run risks. More importantly, SVB is not the only bank to face this novel risk channel: Open communication by depositors via social media increased the bank run risk for other banks that were ex ante exposed to such discussions in social media.”

First reported by Axios, the paper helps us further understand how this dynamic constitutes “a new risk to the financial system.”

The paper examines the impact Twitter users had on what became the largest bank run in history, with $42 billion withdrawn in a single day – $4.2 billion an hour, or more than $1 million per second for ten hours straight.

The study’s authors attempted to answer whether the collapse was caused by the vast number of individuals Tweeting about the event as it was unfolding, or if this activity just exacerbated the situation. What they found was that a large spike in Tweets by influential members of the startup community – who were also “apparent depositors in SVB” – led to negative bank returns and in turn, stock market losses. While the paper did not have readily available data on deposit outflows, they believe outflows and stock prices are “likely highly correlated.”

The idea that a large amount of people would be able to coordinate such an event like a bank run seemed too far fetch even a few years ago. As Christoph Schiller, a Finance Professor at Arizona State University and coauthor of this paper said, “that was a difficult thing to do” until recently.

These increasingly complex dynamics highlight the growing need for companies, investors, and other players to have always-on, professional monitoring systems to alert them in real-time to emerging risks from a range of potential sources, including social media, online organizing, news outlets, etc. At BSG, we have a range of service offerings that do exactly that, helping clients anticipate, monitor, and manage these types of risks in a highly organized, data-driven manner.

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