NEW YORK, May 18, 2010 (FBC) After the Internet-fueled collapse of a Silicon Valley bank two months ago sparked industry turmoil, bankers are beefing up risk management, monitoring and emergency procedures around social media use.
Executives in boardrooms across the United States are designing programs and plans to combat online threats, including rumors about the health of banks, that could eat into deposits or weigh on stocks, seven banking industry executives and analysts said.
The efforts, which have not been previously reported, highlight the urgent need for banks to adapt to changing times, prevent depositors from doing business with banks or stop online attacks on stocks by short sellers.
Lenders are taking action, rethinking the role of social media as a risk rather than a marketing tool after tweets questioning SVB’s financial health prompted nervous customers to withdraw $1 million from their accounts in seconds before the bank collapsed on March 10.
“Social media risk was mainly reputational, but now it has brought flight risks to deposits, which are real,” said Sumeet Chhabria, founder of Insight Link, a consulting and advisory firm that works with banks.
Greg Baker, the former CEO of Silicon Valley Bank, blamed social media for the lender’s “unprecedented” decline. Depositors withdrew $42 billion from SVB in 10 hours, he wrote in testimony to the Senate Banking Committee on Monday.
SVB’s rapid decline stunned markets. On March 8, the lender announced it would sell securities and raise capital. As financial health concerns mount, customers in the Bay Area’s tech industry have taken to Twitter and cashed out through mobile apps or online banking.
Michael Roffler, the former CEO of First Republic Bank, also blamed social media for the collapse two months later.
“It’s a wake-up call for some smaller lenders who are now working to improve their emergency response and risk capacity with business continuity plans to address this risk,” Chabria said.
Bank executives and directors have ordered their companies to add social media to risk management programs, said regional bank officials, who declined to be identified because the discussion is private.
Risk units “Banks have detailed plans to measure, prepare and respond to Internet-related threats,” said one of the executives.
“NIP IT in a group”.
Banks are also contacting customers with complaints on social media to resolve their issues quickly.
“We want to keep him in the team,” said the second executive.
What played out at SVB could easily have happened elsewhere, said Greg Hertrick, head of U.S. deposit strategies at Nomura.
“Any bank that doesn’t pay attention to their social media presence and the impact it has on depositor behavior is doing themselves, their shareholders and most importantly their depositors a disservice,” Hertrich said.
Small lenders are focused on identifying who their depositors are and tapping into influential community members to prevent any misinformation, said Lindsey Johnson, CEO of the Consumer Bankers Association, whose members represent an industry group with $15.1 trillion in assets, or 68% of the U.S. total.
“Many banks are taking a proactive approach to communicating the right message to their customers,” she said. The campaign “includes providing facts and resources to constituents via email, Twitter and LinkedIn,” she says.
The biggest lenders are also taking note. JPMorgan Chase & Co ( JPM.N ) Chief Executive Jamie Dimon cited social media for SVB’s downfall, and Citigroup Inc ( CN ) Chief Executive Jane Fraser he called him. “Complete Game Changer”
As the collapse of SVB and Signature Banks dented confidence in regional lenders, First Republic’s stock fell. A $30 billion deposit from 11 major lenders didn’t stop him from falling, nor did the customer testimonials he posted on LinkedIn to boost his confidence.
First Republic was seized by regulators and bought by JPMorgan earlier this month.
Regulators are also watching. Both the US Federal Deposit Insurance Corporation and the Federal Reserve emphasized how technology has enhanced banking operations. The Financial Stability Board, an international body, is also investigating the role of social media in the recent market turmoil, a source said.
While some banks have a game plan, others are still struggling, analysts said.
“There are so many social media monitoring tools out there today, but the use of those tools is often left to empty marketing teams or third-party vendors,” says Jim Perry, senior strategist at Market Insights.
“Banks have recognized the risks and are beginning to understand that they need to dedicate more staff to social media monitoring, which is not a priority for many small lenders,” Perry added.
Reporting by Nupur Anand in New York; Edited by Lananh Nguyen and Anna Driver
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