Regulators, banks grapple with risks arising from social media, digitalization

REGULATORS and banks in the Philippines need to develop a system on how to immediately respond to issues on social media that may affect public confidence, in order to prevent social media-driven bank runs as seen in the United States, experts said.

Fitch Asia-Pacific Financial Institutions Director Tamma Febrian said that social media has allowed information “to flow at a speed that was unthinkable a decade or two ago,” and has helped lenders market financial products to customers quickly.   

“On the other hand, both social media and digitalization could also increase contagion risks by compounding the effect at which a negative news could have on a bank with seemingly weak fundamentals, as demonstrated by the rapid demise of SVB (Silicon Valley Bank),” Mr. Febrian said in an e-mail interview with BusinessWorld.

The sudden collapse of SVB highlighted the risks arising from social media and digitalization. Last month, social media reports fueled panic among SVB customers, prompting massive withdrawals that ultimately led to the bank’s collapse.

While social media may have played a part in causing the bank runs, Mr. Febrian said the banks’ vulnerabilities and weaknesses ultimately caused their collapse.

“We do not think that the leading Philippine banks that Fitch rates suffer from the same issues that affected these failed institutions, helped by prudential liquidity requirements that BSP has instituted over the years,” he said.

Bangko Sentral ng Pilipinas (BSP) Governor Felipe M. Medalla earlier said Philippine banks have no reported exposure in SVB. He also said Philippine banks are strong and are well-capitalized to weather any risks stemming from the collapse of the two US banks.

“The unexpected failures of two specialized regional banks (SVB and Signature Bank) in the United States in mid-March 2023 and the collapse of confidence in Credit Suisse — a globally significant bank — have roiled financial markets, with bank depositors and investors reevaluating the safety of their holdings and shifting away from institutions and investments perceived as vulnerable,” the International Monetary Fund (IMF) said in its latest World Economic Outlook (WEO).

Meanwhile, Swarup Gupta, industry manager of the Economist Intelligence Unit, said banks in general, including lenders in the US and the Philippines, are not prepared to deal with social media-fueled bank runs.   

“The collapse of Silicon Valley Bank represents the most important cautionary tale of an era characterized by the proliferation of social media on one hand and the ubiquitousness of online banking on the other,” Mr. Gupta said.   

“Both of these phenomena have combined to transform bank runs into veritable bank sprints where deposit withdrawals mount within minutes leading to a quick and complete collapse,” he said.   

In SVB’s case, Mr. Gupta said social media posts on the bank’s troubles were spread by influencers online — some of which were later taken down. In the absence of any response from the bank, panic swirled among depositors.

“Most banks lack a preemptive crisis communications strategy which needs to be employed at the slightest hint of trouble. And most regulators employ an approach which is nearly a century-old which banks on periodic sanity checks, notably stress tests, to ensure that all is well with the banking system,” Mr. Gupta said.   

Contagion risks could spread rapidly in the digital era. He noted this would trigger a domino effect of bank runs even before authorities can help address the issues.   

This is why banks and regulators should closely monitor social media and develop a system to preemptively address any concerns raised on various platforms. There should also be protocols in place to minimize risks before they become a significant threat to the banking system, Mr. Gupta added.

Mr. Febrian said there is a need for banks and regulators to update their crisis scenario playbook.

“Systems and processes are likely to evolve in a way that would allow banks to monitor and respond to issues in real-time manner which could help to stem a loss in confidence during a crisis,” he added. — Keisha B. Ta-asan