Photo by: Minh Nguyen/ (CC BY-SA 4.0)
The speed with which deposits were pulled from Silicon Valley Bank have left many wondering whether mobile banking now carries its own liquidity management risks. Whether SVB’s depositors were largely a tech savvy breed, and therefore an outlier, remains to be seen in the post-mortem analysis by regulators. But some experts believe banks may need to closely monitor social media as part of their risk management framework to get an early sense of whether they might be vulnerable.
On Monday, First Citizens Bank said it would acquire the deposits and loans of failed Silicon Valley Bank, providing markets with some degree of stability after a crisis of confidence ripped through financial markets . The deal comes after the Federal Deposit Insurance Corporation (FDIC), the primary deposit regulator, had worked continuously to find a buyer for the failed California bank. As it announced the deal, the FDIC said SVB’s failure could cost its deposit insurance fund, paid for by member banks, around $20 billion.
SVB was the largest bank to fail since the 2008 financial crisis. California regulators closed the bank on March 10, sparking massive market disruption and heightening stresses across the banking sector globally.
The speed of the collapse was breathtaking. SVB’s depositors withdrew $42 billion in 24 hours, leaving authorities with what some labeled as a new supervisory risk: the social media-driven bank run. The rapid withdrawal of deposits was, according to some reports, accelerated by Peter Thiel, a prominent venture capital investor, who warned his portfolio companies to pull deposits from the bank.
GAME CHANGER FOR BANKERS AND REGULATORS
Reaction to the speed of SVB’s demise led top bankers and regulators to worry that the bank run posed new risk management challenges.
Social media’s role in SVB’s collapse was a “game-changer,” said Citigroup CEO Jane Fraser.
“There were a couple of tweets and then this thing went down much faster than has happened in history,” Fraser said at a March 22 appearance at the Economic Club of Washington, D.C.
Federal Reserve chairman Jerome Powell said in a news conference last week: “It’s very different from what we’ve seen in the past, and it does seem to suggest that there needs to be supervisory and regulatory changes.”
The Fed’s review of SVB’s collapse, which it is expected to be released on May 1, may provide a glimpse of regulators’ thinking on this issue.
The rapid growth of social media since the 2008 financial crisis and widespread use of digital banking by consumers allows information and money to move more quickly than ever. U.S. lawmakers said the issue deserves closer attention by banks and regulators.
“That’s something we’re going to have to deal with. I don’t think we know yet what makes the most sense in dealing with social media,” Senate Banking Committee chairman Sherrod Brown (D-Ohio), said at an American Bankers Association conference March 22.
RAPID GROWTH OF MOBILE BANKING
U.S. consumers have sharply increased their use of mobile banking technology in recent years, with the COVID-19 pandemic accelerating the trend, recent research shows.
According to an FDIC study last year, “use of mobile banking increased sharply (from 15.1% in 2017 to 34.0% in 2019 to 43.5% in 2021) and remained the most prevalent primary method of account access.”
Long lines of customers queuing outside a bank branch during a bank run may be a thing of the past.
“Use of a bank teller declined considerably — from 24.8% in 2017 to 21.0% in 2019 to 14.9% in 2021,” the report said.
The growth of mobile technology in banking services was largely seen in urban areas, however. The use of tellers was still “prevalent among certain segments of the population, including lower-income households, less-educated households, older households, and households that did not live in a metropolitan area”.
Adding a further boost to online banking was the COVID-19 pandemic. “Prior to COVID-19, 33% of bank customers used apps on phones or other mobile devices as their top option for managing their bank account,” the American Bankers Association said in a survey.
“During the pandemic, the frequency of digital channel use increased even further (44% mobile app, 26% online) while branch banking fell to 10%,” the ABA said.
When one looks at demographics, the trend is even more pronounced among younger people.
“More than half of Generation Z, Millennials and Generation X now use mobile banking apps most often, and a plurality of all three groups also used that method the most immediately prior to the pandemic,” the study said.
IMPLICATIONS FOR BANKS AND REGULATORS
With a growing segment of bank customers able to transfer deposits at a push of a button, experts say that the behavioral preferences for mobile banking and influence of social media may require banks to think about the consequences for liquidity risk management. If bank runs can now be ignited by social media in ways not seen before, it might be something both bankers and regulators need to consider.
“The fact that people can communicate so much more quickly … (has) changed the dynamic of bank runs and perhaps changed the way we have to think about liquidity risk management,” Todd Baker, a senior fellow at Columbia University’s Richmond Center, told Reuters.
“In theory, a robust system of internal controls at individual banks would include constant social media monitoring for depositor rumors and panic as well,” Patricia McCoy, professor at Boston College Law, told Regulatory Intelligence.
“This is particularly important for larger banks that pose the risk of contagion to the larger financial system…Recent events tell us that regional banks can spark systemic risk, just as megabanks.”
McCoy, who previously helped form the Consumer Financial Protection Bureau (CFPB) in the aftermath of the financial crisis, said SVB’s collapse also suggested regulators might need to incorporate social media monitoring in their oversight role.
As with other U.S. agencies, such as the Securities and Exchange Commission that monitors market movements for potential fraud and U.S. security and intelligence agencies who scour the internet for possible terrorist activities, the risks to the banking system from rumors on social media may require greater attention.
“The events of the past two weeks tell us that it is critical for federal banking regulators to monitor social media 24/7 for signs of potential depositor panic and incipient bank runs,” McCoy said.
“Ideally, this monitoring office would be centralized — ideally in the Treasury Department or the Federal Reserve — and would provide real-time surveillance for use by all of the federal bank regulators.”
Experts said the Fed’s review of SVB’s failure might include such changes. In addition, upcoming hearings in Congress could focus on the role that social media and mobile banking played in the bank’s collapse.
Source: Reuters
