Social media, a new ‘mob’ fuelling bank run?

2023 was flagged off with bank runs fuelled by social media, especially twitter and driven by technological advancements in the US banking sector leading to seamless deposit outflows in some banks and consequently leading to their collapse.

Whereas technological advancement in the banking sector is not a peculiar factor in the most recent runs, unlike in the past where the banking sector relied on phone calls, faxes and in person banking, it cannot be written off as big factor facilitating bank runs. Today, even the smallest deposit holders have swift access to their deposits which makes deposit outflows seamless.

The collapse of Silicon Valley Bank, Signature Bank and Silvergate Bank make a perfect case for the modern-day bank runs fuelled by social media with the aid of technologies.

For context, the depositors of the above banks were somewhat a connected community, Silicon Valley Bank depositors, for example, were majorly startups connected through venture capital backers, Silvergate’s and Signature’s large number of their depositors were crypto-asset firms that used the two banks for realtime payments with each other, business models based on transferring money instantly. The banks’ ‘dirty linens’ were washed on social media by this class of depositors behind their keyboards leading to a bank run.

These banks were serving a specific community of techsavvy depositors. That in itself, should have rather been a safeguard against a social media fuelled bank run; the presumption is that such a class of depositors knows that sharing unsubstantiated information would have an implication of ‘undermining’ the trust and confidence the depositors have in any financial institution- and at worse in the entire financial system.

In Uganda, for the past few days, dear reader, you must have seen claims of loss of depositors’ funds being made through tweets and Tiktok, a friend on his WhatsApp status argued that Uganda’s financial sector “will most likely see a bank run fuelled by social media for the very first time.”

I was dismissive of his arguments, and this is why.

Uganda’s population is projected by UBOS to be just over 45million people. According to the annual Depositors Protection Fund report for Financial Year2022, the number of banking accounts stood at 21 million as of June 30, 2021. Owing to the rapid uptake of financial technologies (fintechs) in the sector, the presumption is, the accounts are accessible through the various digital platforms, arguably making a bank run most likely.

However, as already argued, the adoption of seamless financial technologies alone may not be a big factor towards bank runs; information flow facilitated by the bulging internet and social media users is the gas pedal that accelerates bank runs.  For example, Uganda’s internet penetration rate stands at only 22% of the entire population and only 4.3 % of the population use social media platforms. The interpretation of this data indicates that microblogging platforms per-se may not fuel a bank run.

Unlike Uganda, the US where we saw social media-fuelled bank runs, social media usage stands at a whopping 302.35 million people. That means 90% of the total number of the general US population uses social media actively, a few deposits scaring tweets against a bank may spark a bank run on.

Does it mean that our banking system is immune to social media bank runs and contagion risks?

The long and short of it is, we are not immune!

In my opinion, it is how long the damaging information about a financial institution is shared that will matter.

I cannot underestimate the power of social media; yet, I cannot exaggerate its power because of its inherent weaknesses and limitations. In the past few months, we have seen positive X (formerly Twitter) exhibitions raising storms.  This is partly because, in one way or the other, each one of us has interfaced with the ugly heads of those potholes and the foul spits of the healthcare system but the banking sector may not have as much of its audience on these social platforms to hasten a bank run.

That said, the exhibitions were of course not without exaggerations, sharing unverified information and some misinformation, if such sensationalised and protracted damaging information is shared for example against a financial institution, it may indeed go far and wide and overwhelm any public relation interventions, making a bank run most likely.

The juxtaposition between Uganda and US shows that the more the numbers of social media users, the more a social media fuelled bank run is likely to happen. In this, the constant is that social media platforms will continue growing in numbers. Financial institutions must clean up their houses and invest in consumer dispute channels to avoid consumer related disputes from spilling over social media platforms.

Timothy Amanya  legal Department of Finance Trust Bank