Frances Coppola on the power of salacious rumour.
On Friday 10th March, a bank died. Silicon Valley Bank’s sudden failure sent shockwaves across the world. How could an apparently sound bank collapse into insolvency in less than two days? Even Lehman Brothers didn’t collapse that suddenly: it was known to be in trouble well before the dramatic crash on Monday 16th September 2008. But all Silicon Valley Bank had done was sell some bonds and try to raise a small amount of capital. How did this trigger a catastrophic bank run?
The following week, a much bigger bank died. To avoid a catastrophic financial meltdown, Swiss regulators arranged a forced marriage between Credit Suisse and its larger rival UBS. Credit Suisse had been a troubled bank for a long time, but its fortunes took a sudden turn for the worse in October 2022. Despite a major restructuring, it never recovered. But what caused this sudden change?
Both banks were victims of what we might call the power of rumour. Both suffered catastrophic bank runs after a sudden loss of confidence due to rumours spread on social media, and by Whatsapp, email and chat groups.
Word of mouth is the usual way that bank runs start. The famous run on Northern Rock started when news that the bank had approached the Bank of England for emergency funding hit media headlines. And in 2014, Bulgaria’s third-largest bank, KTB, suffered a catastrophic bank run when fears of fraud spread among its depositors. KTB’s supporters used SMS to spread a counter-rumour about a competitor, FiBank: they succeeded in starting a run, but the Bulgarian central bank intervened to head it off. The battle between the banks brought down the Bulgarian government.
But what is different in this case is the speed at which the rumours spread – and the way in which an opinion spread on social media can become a “fact” that no amount of actual fact or calm analysis can debunk.
People started to speculate that the financial world was facing another Lehman-like meltdown.
In October 2022, a rumour spread on social media that a global systemically important bank (GSIB) was about to fail. People started to speculate that the financial world was facing another Lehman-like meltdown. The rumours centred on one particular bank – the giant Swiss lender Credit Suisse.
The source of the rumour was a journalist from Australia’s ABC news. On 1st October, he tweeted: “Credible source tells me a major investment bank is on the brink”. Two days later he deleted the tweet, apparently in response to the news outlet “reminding him of its social media guidelines”. But the damage was done.
The tweet had been seen by professional and armchair pundits all over the world, who collectively concluded that it must be about Credit Suisse. The bank’s share price promptly fell by 11.5%, and the price of the credit default swaps that traders use to bet on the probability of it defaulting on its debts soared to record highs. Worst of all, people started to remove their money. By 11th November, when the bank announced its recovery and restructuring plan, deposits totalling some $88bn had left the bank, never to return.
To be sure, Credit Suisse was hardly in the best of shape. It had been involved in multiple frauds and scandals and was facing heaps of potentially expensive litigation. And it was only barely profitable – indeed in July 2022, it reported a half-year loss. But was it on the brink of collapse? No. It was in fact on the brink of a major restructuring. It was considering raising $5bn of new capital and making major cuts to its badly-performing, scandal-ridden investment bank. You’d think this would have generated confidence, wouldn’t you? But it only takes a single ill-considered tweet from a supposedly credible source, and hey presto! The bank is on the skids.
Credit Suisse’s hapless chief executive, Ulrich Koerner, inadvertently added fuel to the flames. He wrote a memo to staff saying the bank’s “capital and liquidity were strong”. The memo was leaked to the press and circulated on social media. Twitter, inevitably, remembered that less than a week before Lehman’s collapse, its chief financial officer had told investors that the bank’s liquidity position “remains very strong”, and that Bear Sterns’ chief had also used almost exactly the same phrase three days before the bank collapsed. It was like a jinx. If a bank executive says its capital and liquidity is strong, the bank is doomed.
And doomed it turned out to be. The accounts published in February 2023 revealed the terrible damage caused by the Twitter-induced bank run. Credit Suisse reported a full-year loss of CHF7.3bn (Swiss francs) of which CHF1.4bn was from the fourth quarter alone. The investment bank’s revenue fell by 74% in that quarter; but worse still, the loss of deposits and assets had also caused revenues to fall in the bank’s important wealth management, asset management and Swiss bank divisions.
To try to restore its fortunes, Credit Suisse announced plans to take an axe to its investment bank and cut 9,000 jobs, about a sixth of its worldwide workforce. But rumours continued to spread that Credit Suisse was in very bad shape. And then came Silicon Valley Bank’s collapse.
You’d think that would be a safe bank, wouldn’t you? But it turned out to be anything but.
Silicon Valley was a medium-size US bank with a deposit base highly concentrated in flighty tech startups funded by venture capitalists, and an asset portfolio largely consisting of government bonds. You’d think that would be a safe bank, wouldn’t you? But it turned out to be anything but.
Because of rising yields in recent months, the market value of its assets had fallen significantly; if it had been recording these losses, it would have been insolvent. But as it was planning to hold the vast majority of assets to maturity, at which point it would receive back their face value not their market value, it didn’t record the fall in market value. It was, therefore, on paper a comfortably solvent bank.
On 8th March, the bank announced that it had sold some of its longer-dated government bonds at a loss of $1.8bn and planned to raise $2.5bn of new capital to finance shorter-term replacements. This was an entirely reasonable balance sheet restructuring that should have caused no problems. But for reasons we don’t know, Silicon Valley chose to announce this the day after the crypto-focused bank Silvergate went into self-liquidation.
The court order reveals that $42bn left the bank in less than a day. Never in history has a bank gone down so fast.
Silicon Valley’s depositors panicked – or perhaps, more accurately, their venture capital backers did. Prominent venture capitalists contacted their protégés by email, Whatsapp, chat groups and Twitter to tell them to remove their funds. Within 24 hours, the bank was bust. On 9th March, the regulator obtained a court order to close it down.
The court order reveals that $42bn left the bank in less than a day. Never in history has a bank gone down so fast.
A second bank, Signature Bank New York, was caught up in the maelstrom. On Friday 10th March it lost 20% of its deposits. Its regulator closed it down over the weekend.
In the middle of this mayhem, Credit Suisse revealed that it had to delay publication of its final accounts because of an objection from the US’s Securities and Exchange Commission (SEC). When it published them a few days later, it admitted that “material weaknesses” had been found in its financial reporting processes for 2021 and 2022. Twitter, ever vigilant, noticed that Signature Bank had also delayed its accounts and admitted to dodgy reporting processes just before it failed. Rumours spread that Credit Suisse really was on the brink, this time…
And then the final blow fell. The chairman of Saudi National Bank, one of Credit Suisse’s biggest investors, said it would not provide any more capital, apparently for regulatory reasons. He later resigned his post. But it was too late. Despite the Swiss National Bank’s attempts to talk up its flagship, Credit Suisse’s share price plunged 24% to an all-time low, and deposits flooded out of it.
Over the weekend of 18th/19th March, Swiss authorities frantically brokered an agreement for UBS to take over Credit Suisse with effect from 19th March. A 164-year-old bank is no more.
As it turns out, there was no Lehman-style financial meltdown. But the power of social media to amplify and accelerate rumours is terrifying. And as things stand, there is no obvious way to make banks, and indeed corporations and individuals, safe from the destructive power of Twitterstorms.
