The do-it-yourself mentality in banking has disastrous results.
Social media may not shoot, but it has the power to kill…
The Credit Suisse collapse was the result of several factors, but the “trigger” for this banking “explosion” in Europe was a tweet.
For good measure, on October 1, 2022, ABC’s Australian business reporter David Taylor tweeted that, according to his sources, a major investment bank was on the brink.
He may not have “photographed” it himself, but his post went viral and soon rumors were betting it was Credit Suisse, Switzerland’s second-largest bank. In fact, gossips went one step further and predicted his sudden death within the next weekend, writes Foreign Policy.
Is it all a tweet?
On Monday, Taylor had deleted the tweet in question, but when the markets opened that day, Credit Suisse shares had already lost 12% of their value. And the truth is that it has never recovered since then, because despite the guarantees of its directors of sufficient liquidity, its depositors did not stop withdrawing their savings until the Swiss authorities were forced to force the other big Swiss bank, UBS, to to accept your purchase.
Credit Suisse has had problems for many years that were essentially of its own making. Everyone knew this. Over the years, the bank has lost money and credibility due to reckless investments in a hedge fund and finance company, excessive bonuses, a CEO spying on its own management, and more.
However, those who knew the situation well from the inside said that in the last year and a half the situation had improved significantly. The bank’s management was stable, the financial situation had improved, and the scandals seemed to have ended.
On March 19, when Credit Suisse was taken over by UBS, Marlene Amstad, president of Finma, confirmed that Credit Suisse’s deposit and investment outflow had been prompted by rumors circulating since last fall in direct reference to the controversial tweet. of Australia As the president of the Swiss bank, Alex Lehman, summed up, social networks and digitization had “reaped the flames of fear.”
before and after
The previous banking crisis, in 2007-08, was a credit crisis. Bankers, fueled by the adrenaline rush of the prospect of big bonds, gambled with risky new products like collateralized debt obligations. At that time there were few relevant regulations and zero supervision. This time, however, it was not “red” loans that threatened some banks, but interest rate hikes by central banks around the world.
Following the Credit Suisse bankruptcy, bets began to be placed on which other major European bank would follow the same path of destruction. The first name to touch the table was Deutsche Bank, but concerns soon died down. Fifteen years after the last banking crisis, say financial experts, European banking supervision has improved.
The rules are stricter than in 2007-08, so strict that European banks now complain that their “work” is funneled into the unregulated shadow banking sector. “Banks, especially in Europe, are in better shape than they were 15 years ago,” says Nicolas Veron, a banking expert at the Brussels-based think tank Bruegel. “I don’t think we are in a banking crisis,” he emphasizes.
However, it is very true what is said that people prepare for the previous crises, without paying attention to the new dangers. One such risk is the rise of social media, combined with the fact that today customers are transacting digitally 24/7. Before Credit Suisse, whose fate was sealed by a tweet, Silicon Valley Bank (SVB), on the other side of the Atlantic, collapsed in just two days.
Silicon Valley Bank also intervened
How did this happen? Fund managers advised their panicked clients to empty their accounts. These customers then shared their experiences on Twitter and WhatsApp, and in a matter of hours $42 billion had been blown out of SVB’s coffers.
The situation was “a bank sprint, not a bank run,” Michael Imerman, a professor at the University of California, Irvine, explained to The Guardian at the time, stressing that “social media played a key role in its collapse.”
In recent years, the relationship between banks and their customers has changed dramatically. Until yesterday, customers paid attention to what bankers told them. Now, they get their information from websites and social media.
According to British sociologist specializing in finance, Donald McKenzie, social networks are not just an event “camera” (that is, a way of seeing what is happening around you), but rather an “engine”, which drives the developments.
Social Media Are Taking Stocks Down
Proof of this is that, as a group of US economists who studied the effect of 5.4 million tweets published from 2020 until recently concluded, “negative returns (for bank share prices) normally occur after periods of intense chat on Twitter.”
Commenting on this, Charles Henri Monchaux, managing director of investments at Swiss Syz, spoke of the… Ikea syndrome, that is, do it yourself, but in the banking sector. In other words, “why trust your bank when someone has done some clever analysis on Twitter?”…
What proved fatal for Credit Suisse, Monchau said, is that the bank, like SVB, failed to realize that with the rise of social media, the “know your customer” principle (banks track their customers) has been cancelled. “Today, it’s ‘know your bank,'” she said: customers are looking at the banks.