The New Risk – Social Media

It all started with IndyMac Bank (CA), when the FDIC moved to close the $32 billion bank July 11, 2008 – the FDIC’s fourth largest bank failure at the time. IndyMac had been heavily invested in mortgages – which were the drivers behind the Great Recession - and low on liquidity. However, it was advance comments made in June 2008 regarding the pending IndyMac closure by a prominent member of Congress, that many believe precipitated the run that occurred and the beginning of a general loss of confidence nationwide in all forms of banking, including credit unions.

While social media in 2008 was not quite what it is today, messaging was, and the message of Indy Mac’s anticipated failure and eventual failure spread quickly, contributing to the President’s actions in October 2008 and the federal legislation that quickly followed (EESA). The President’s actions to more than double the $100,000 deposit insurance limits to $250,000 for most depositors, and to temporarily set an unlimited amount of federal deposit insurance on business transaction accounts, calmed the developing runs on bank deposits and protected the American consumer and their employers.

It was today’s social media, however, that was accused of fueling the mid-March crisis at the Silicon Valley Bank (SVB) in California, a state-chartered, FDIC-insured, $220 billion bank – virtually in real-time. Once a few depositors realized that SVB had liquidity problems, the word spread immediately via social media amongst that bank’s close-knit business leader customer base and others. As a result, the FDIC again found itself needing a spontaneous solution to stall this run, which it did, but not without a cost to other federally insured banks.  

How this year’s attention on the mismanagement of this small pool of failed banks, and the role that social media will play in managing risk going forward, may affect future legislation and banking regulation is yet to be determined. Stay tuned!