Bank stability is something too many people have taken for granted for too long. After the last global financial crisis of 2008 and the subsequent recovery, many naively believed that all serious systemic vulnerabilities have been addressed and bank collapses - or even worse, contagion scenarios - would be wildly unrealistic in the future.

However, this was revealed to be mere wishful thinking in March 2023, when Silicon Valley Bank (SVB) collapsed, followed by Signature Bank, First Republic, Heartland Tri-State Bank and, most infamously, Credit Suisse. Now, there are renewed fears surrounding bank stability. And the way that bankers and regulators seem to be dealing with these very legitimate concerns raises even more questions.

Another banking crisis in the making

The ongoing geopolitical conflicts that have divided the world and disrupted global trade and cooperation have obviously affected the banking sector too and will continue to do so for the foreseeable future. However, a much more urgent threat lies in the meltdown of the US commercial real estate (CRE) market. As our colleagues at BFI Infinity pointed out over a year ago, the CRE crisis has the potential to shake the banking system to its core. It might mostly be regional banks that are directly under threat at the moment, but due to the interconnectedness of the global financial industry, contagion is a very real possibility, just like we saw last year.

Back in May, Barry Sternlicht of Starwood Capital Group predicted a regional bank would fail every day or every week” and Newmark Chair Howard Lutnick warned that every single weekend a regional bank is going to go bye-bye,” expecting to see 500 to 1,000 failures in 2025 and 2026. As the Harvard Business Review recently summarized: Over the next two years, more than $1 trillion in commercial real estate (CRE) loans will come due, according to The Conference Board calculations using MSCI Real Assets data. Institutions with the most concentrated exposures, insufficient capital cushions, and limited lifelines from larger institutions or regulators face significant losses. The damage could metastasize into a full-blown financial crisis if scores or even hundreds of small- and midsize commercial banks fail simultaneously. A worst-case scenario might include contagion to other economies and banking deserts across the U.S. As the Federal Reserve keeps interest rates elevated and CRE risks worsen with falling property values, businesses will continue to experience restrictive financing conditions.”

Deflecting blame

Given the fact that this has been a slow-moving crisis, one would think that the banks themselves would have learned from past mistakes and prepared better for what lies ahead. At the very least, it would be reasonable to assume that regulators would have forced them to take measures to ensure future stability and protect their customers. After all, the SVB-triggered bank run domino of last year was the banks ’own fault and a spectacular failure in basic risk management. And yet, some analysts and academics have tried to shift the blame for this and for future banking crises by arguing that the panic was caused by people posting their personal views on social media (on Twitter in particular, or X” as it is now known).

As CNBC reported, a working paper published in the aftermath of the SVB failure argued that greater exposure to social media amplifies the risk of a bank run: 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…Given the increasingly pervasive nature of social communication on and off Twitter, we do not expect this risk to go away, but rather, it is likely to influence other outcomes, as well.” A recent S&P report went even further, highlighting that private forums on platforms such as WhatsApp, Signal and Discord pose different risks than public platforms (Facebook, Instagram and LinkedIn), where information can be monitored by banks and regulators. Dissemination of malicious information can be difficult to monitor in private groups, limiting the ability of banks and regulators to react effectively.”

Some central bank officials and regulators seem to have adopted this narrative that paints social media users as the true threat to bank stability. In order to avert the next banking crisis, they have started coming up with new rules that supposedly help reduce the banks ’exposure to panic induced by social media. Most of these ideas include obvious measures to boost depositor confidence, like increasing the banks ’liquidity, or expanding deposit insurance schemes, but those approaches have clearly been met with opposition by the industry. Given the fact that 2024 is a global election year, it is perhaps understandable why politicians would not want to antagonize the banking sector. Therefore, other containment” ideas are starting to emerge, shifting the focus away from the banks themselves and instead zeroing in on their customers.

Bank of England governor Andrew Bailey told a conference in Morocco that the central bank is actively monitoring Twitter to guard against banking collapses, while it has also been reported that it encouraged UK-based banks to establish monitoring protocols for threats emerging from socimedia. The ECB also monitors public posts by social media users on different social media channels, forums, blogs and online news websites” and that includes personal identification data, i.e. name and geographical location.

The U.S. Federal Reserve has stated that the combination of social media, a highly networked and concentrated depositor base, and technology may have fundamentally changed the speed of bank runs. Social media enabled depositors to instantly spread concerns about a bank run, and technology enabled immediate withdrawals of funding.” The IMF struck a similar tone too: "Although new technology can increase the risk of bank runs, banks may also use technology to reduce the risk. For example, AI tools may be developed to improve liquidity management and monitor withdrawal patterns, which could help lower bank-run risk.”

Slippery slope

The one concept that keeps coming up in all these analyses and risk assessments is the idea of proactive monitoring” of relevant social media platforms and other digital communications, either by the banks themselves (keeping track of their ” and online chatter about them) or by state regulators and central banks (using tech to fight tech”, in order to detect early triggers that could lead to a wider crisis of faith in the banking system).

Of course, this line of thinking is not entirely unreasonable, especially in cases where misinformation is spread, fraudulent schemes are endangering investors, or irrational herd behavior emerges, like the crypto scams of the last decade or the ”meme stock" phenomenon of the last few years. Individuals who knowingly publish false information and unfounded allegations against any entity, corporate or human, should be prosecuted. That’s why we have consumer protection regulations or libel and defamation laws, after all. However, there is a very important distinction between enforcing those laws against fraudsters and genuine bad actors and targeting perfectly law-abiding citizens for simply voicing their personal opinions and sharing their experiences.

Normalizing social media monitoring, be it by banks or by state regulators, is a very slippery slope and it can lead us down a truly sinister path, depending on what the information collected is used for. For instance, it is not inconceivable that a bank would choose to drop vocal critics as customers and/or reward or indirectly incentivize others that have kinder words to say about it. The implications are even worse if it is a state authority that does the monitoring. Apart from their stated goal of "early threat detection” in the banking sector, what else could these data harvesting and collecting systems be used for? Identifying rumor clusters and potential bank run triggers is one thing, but the real question is what is to be done about them after they are detected?

Sure, online rumors can and do spread like wildfire but, far more often than not, they do so for a good reason. The same way that reports by short sellers help weed out fraudulent or failing companies by warning other investors, so do many of these social media posts and online forums. Communication between market participants and information sharing is literally how price discovery works. By limiting it or discouraging it in any way, one only limits market efficiency.

Even worse, one provides special protections from public criticism to an industry that is almost entirely reliant on reputational status. Most of the time, the average depositor only finds out about the true state of their ailing bank from news reports and most news reports are now rooted in social media chatter. This is why placing restrictions on individual freedom of speech to protect said ailing banks is not only unconscionable, but it also denies individual bank customers the chance to act early and protect their hard-earned savings