Social Media Catalyzed Recent Bank Failures, Paper Claims

A security guard at the failed Silicon Valley Bank monitors a line of people outside the office in Santa Clara, Calif., on March 13, 2023. Justin Sullivan/Getty Images

“Social media fueled a bank run on Silicon Valley Bank (SVB), and the effects were felt broadly in the U.S. banking industry,” reads the first line of an academic paper discussing the role of social media in the collapse of tech bank SVB in March.

The study, led by J. Anthony Cookson of the University of Colorado–Boulder, states that social media chatter “amplified” the risks that ultimately led to the bank’s failure.

In March, SVB, a bank that primarily served startup businesses, became the largest bank failure in the United States since the 2008 financial crisis and the second-largest ever in U.S. history. Members of the venture capital community, who were investors in the very companies affected by SVB’s collapse, have expressed remorse over their role in spreading panic, with one referring to it as a “hysteria-induced bank run caused by VCs.”

The newly published paper alleges that “tweets in the run period with negative sentiment [translated] into immediate stock market losses,” referring to the period of time between Jan. 1, 2020, and March 13, 2023. The authors of the paper analyzed original tweets in this window containing a financial institution’s stock tickers and examined stock price data and hourly stock returns from the first half of March to identify the effect of bank-related tweets on stock returns.

The paper notes that the “effects are stronger when tweets are authored by members of the Twitter startup community (who are likely depositors) and contain keywords related to contagion.” Cookson and his fellow researchers stop just short of pinning the entire banking crisis on prominent Twitter users.

David Sacks, a start-up millionaire who co-founded a host of different tech companies, including PayPal, was one of many sounding the alarm over SVB at the time.

“If the Fed doesn’t nip the bank run in the bud, regional banks will be decimated, and all that will be left is the biggest banks,” Sacks wrote on Twitter on March 10. “You know, the ‘too big to fail’ ones. This will not help the little guy.”

The paper found that such tweets had a material effect on SVB depositor behavior.

“During the run period, we find the intensity of Twitter conversation about a bank predicts stock market losses at the hourly frequency,” the paper reads. “These results are consistent with depositors using Twitter to communicate in real-time during the bank run.”

Pershing Square founder William Ackman was another influential voice at the time of the collapse, warning that there would be subsequent bank failures if SVB wasn’t bailed out.

“Absent a systemwide Federal Deposit Insurance Corporation deposit guarantee, more bank runs begin Monday am,” he wrote on Twitter on March 11.

CEO and Portfolio Manager Pershing Square Capital Management L.P. William Ackman speaks at The New York Times DealBook Conference at Jazz at Lincoln Center in New York on Nov. 10, 2016. Bryan Bedder/Getty Images for The New York Times

By warning of further crises, the paper alleges that these voices on Twitter were inadvertently exacerbating the problem.

“Communication and coordination pose a risk to banks, especially when many of the deposits in the bank are uninsured,” the paper reads. “The amplification of bank run risk via Twitter conversations is a unique opportunity to observe communication and coordination that shapes a critically important economic outcome—distress in banks.”

Risks ‘Unique to the Social Media Era’

The paper also highlights that SVB is only one of many banks to face this novel risk channel.

“Open communication by depositors via social media increased the bank run risk for other banks that were exposed to such discussions in social media beforehand,” the authors wrote.

The findings of this research highlight the significant influence of social media in shaping economic outcomes and raise concerns about the ongoing risks faced by banks in the digital age. As social media continues to permeate various aspects of society, the authors of the paper caution that this risk is unlikely to dissipate but rather may impact other outcomes as well.

“Discussion amplifies risk,” Cookson told The New York Times in an interview last week.

He and his colleagues identified this form of financial risk as “unique to the social media era.”

“Given the increasingly pervasive nature of social communication on and off Twitter, we do not expect this risk to go away,” the paper reads.