Social media has transformed the way that financial service providers can interact with customers, market offerings and build their brand image. Yet, these platforms are increasingly vulnerable to misuse by individuals and interest-driven online communities as a conduit to broadcast harmful, and at times fabricated narratives to a vast global audience in real time.
The digitization of the financial sector has acted as a catalyst for the rise of mobile trading, digital currencies, and financial influencers. This seismic shift in the architecture of the financial sector has also exposed brands to new vulnerabilities arising from financial speculation and adverse commentary online. Easy access to funds coupled with the power of social media to fuel herd behavior and accelerate financial contagion have created a landscape ripe for price manipulation, market disruptions and potential liquidity crises triggered by social media-driven panic withdrawals.
Social Media and Market (In)stability
The role of social media as a potential “rainmaker” in financial markets was first brought to public attention in January 2021 after stock in failing US-retailer Gamestop (GME) rallied by over 1,700% in a matter of days, a price raise that was induced by retail investors and social media influencers coordinating trades through social media.
The Gamestop saga reiterated the power of social networking platforms to drive collective behavior and serve both as a repository for exchanging stock trading related information and a mechanism for users to coordinate their trades. A Financial Stability Report released by the US Federal Reserve in the aftermath of the GME rally warned of how ‘a single comment or post’ amplified online could ‘reach millions of people and potentially affect market sentiment dramatically within a short period.’
This prognosis proved prescient when in October 2022 a single social media post from a journalist warning of a major financial institution being ‘on the brink’ triggered a run on Credit Suisse with clients of the institution withdrawing over $116 billion by the end of the fourth quarter of that year. Shortly after, in March 2023, a series of depositor runs, accelerated by rumors and financial speculation on social media platforms, led to the collapse of Silicon Valley Bank (SVB), Signature Bank, and First Republic Bank in quick succession.
A subsequent report published in The Board of Governors of the Federal Reserve examining the regulators’ handling of the 2023 banking crisis noted how the combination of ‘social media, a highly networked and concentrated depositor base, and technology’ had ‘fundamentally changed the speed of bank runs’.
Accelerating traditional financial risks
Now, in 2024 as the democratization of financial access helps facilitate retail investor participation in financial markets, the risks posed by unregulated and inauthentic social media activity leveraged to manipulate public perceptions of brands and trust in the financial system continues to mount.
Within this febrile informational environment, even false allegations made against banks accusing them of unethical practices or poor customer service can instantaneously spread across several mainstream platforms, attract public and regulatory scrutiny, and tarnish brand reputation that had been painstakingly built over decades. Accordingly, in January 2024 the European Central Bank called on financial institutions to closely monitor social media platforms for a worsening of sentiment that could lead to a deposit run.
Troublingly, the financial threat posed by social media induced disruptions grows more acute when considered within the context of a bleak macroeconomic environment in the coming years. Deloitte 2024 Banking and Capital Markets Outlook predicts that higher interest rates, reduced money supply, assertive regulations, climate change, and geopolitical tensions will act as key drivers that will ‘reshape the foundational architecture of the banking and capital markets industry.’ The forecast concludes that social media is amplifying classical bank run risk factors, at a time when those factors are increasing in severity.
Prevention is better than cure
Experts have identified two key factors governing the impact of social media on bank runs. The first factor is ‘pre exposure’ entailing an initial spike in activity related to the bank or financial service on social platforms, and the second is the coordinated activity of some motivated users who drive engagement on the topic,instigate speculation around the financial health or valuation of a company or service, and in doing so hasten the exit of fleeing depositors.
A research paper published by Université Paris-Dauphine analyzing the 2023 Banking crisis found that ‘banks in the top tercile of preexisting Twitter conversation’ experienced 6.6 percentage points larger stock market loss’ during the SVB run. The correlation between spikes in social media activity and trading volumes led the researchers to conclude that not only had ‘social media contributed to the run on SVB’ but had also ‘amplified the severity of the episode for other banks.’
These results conform with Resolver’s internal analysis of the social media landscape in the lead up to the SVB run. Our investigation of on-platform activity over the run revealed early indicators of a spike in online commentary targeting the bank as far back as December 2022, while the scale and speed of speculation and adverse commentary was drawn out starkly in volume-over-time analysis.
Early social media commentary pre-dating problematic financial statements released by SVB in March 2023.
Turquoise line being Google search interest (*normalized and indexed on a scale of 1-100), pink bars being social media mentions. Search interest rose in tandem with social media mention volume
The presence of early-warning signals was also highlighted in our more recent evaluation of social media activity ahead of, during, and after the significant plunge in New York Community Bank (NYCB) shares in January 2024. In particular, our analysis detected over 10,800 unique mentions of the bank across several social platforms on January 31 shortly ahead of the institution reporting its fourth-quarter results, an announcement that triggered a 40% decrease in the price of NYCB shares. The data also revealed that user discussions extended far beyond discussing the bank with several high performing posts speculating in the broader collapse of the regional banking sector as a whole.
Examples of investor posts that critically referenced the stability of the US regional banking climate.
Our analysis also highlights how the use of effective social media monitoring and network analysis could allow banks and financial services to identify false and damaging narratives and key instigators of coordinated activity early on. Adopting a proactive approach towards threat detection can also expand the range of options available to respond, whether that is the formulation of an effective comms strategy, enforcement action against users engaging in inauthentic activity for market manipulation or the implementation of pre-defined mitigation strategies.
Conclusion
Taken together, an overview of the significant crises in the financial industry since early 2021 highlight how the digitization of banks and financial services have improved customer efficiency and participation but also made brands vulnerable to disruptions caused by rumors and adverse commentary amplified online. Social media now plays a critical role in molding market sentiment, fuelling financial speculation and uncertainty, and even accelerating traditional balance-sheet risks in the sector.
In recognition of the increasingly existential threat to brand reputation, we are increasing access to our state-of-the-art Reputation Monitoring solutions. Focused and paired with Kroll advisory services and expertise, our solution is designed to help our partners in the financial sector proactively detect and promptly mitigate emerging threats to their reputation and stability originating from false and misleading narratives, adverse commentary and coordinated activity amplified across a fast evolving platform landscape.
