The paper says that social media expands bank operation risk, filled by Silicon Valley Bank's failure

April 25, 2023: Following the sudden end of Silicon Valley Bank in March, market participants quickly pointed out the role social media operated in the velocity of its failure.

After six weeks, a working paper co-authored by a group of university professors digs much deeper into the cause and outcomes of social media in the case of SVB, which argues that greater exposure to social media amplifies bank operation risk and warns that different banks could face similar risks.

“Communication and coordination are posing a risk to banks when many of the deposits in the bank are not insured,” the academic paper states.

“The amplification of bank operate risks through Twitter conversations is a unique opportunity to look for communication and coordination that shapes an important economic result, distress in banks,” the paper further stated.

Furthermore, “given the surging pervasive nature of social communication on and off Twitter, we do not anticipate this risk to go away. Instead, it is likely to influence different outcomes, as well.”

In March, Silicon Valley Bank, a firm primarily serving startup businesses, is now the biggest bank failure in the U.S. from the 2008 financial crisis and the next most significant in 48 hours.

Members to get a capital community of investors in the companies caught in the crisis have lamented their role in spreading panic. One is known as it a “hysteria-induced bank run caused by VCs.”

The working paper’s authors examined original tweets (no retweets) from between January 1, 2020, and March 13, 2023, including a financial institution’s cash tag. They also looked at stock price information and hourly stock returns from the initial half of this March to identify the impact of tweets on the stock return of the bank.

“During the operating period, finding the intensity of Twitter conversation about a bank which predicts stock market losses at the frequency of the hour,” the paper states.

“These results are consistent with depositors which use Twitter to communicate in real-time during the bank run.”