The Digital Domino Effect: Enhancing Resolvability in an Age of Social Media-Induced Crises

At the same time, this digital revolution has also exposed banks and other financial institutions to new vulnerabilities arising from the interconnected nature of the online information environment.

By providing instant access to a global audience of users in real time, social platforms are vulnerable to misuse by malicious actors and interest-driven online communities that aggregate and accelerate negative sentiment, targeting financial institutions. Information shared on one platform can quickly metastasize across the broader platform landscape, triggering panic among customers, investors and other stakeholders and destroying brand reputations built over decades.

As financial institutions continue to digitize their operations and customer touchpoints, they must grapple with an ever-evolving risk and regulatory landscape where reputational, operational and liquidity risks are intertwined and capable of cascading swiftly through multiple digital channels.

The Digital Domino Effect

Easy access to funds coupled with the power of social media to fuel herd behavior and accelerate financial contagion have created a landscape ripe for price manipulation, market disruptions and potential liquidity crises triggered by social media-driven panic withdrawals.

In October 2022, a single post from a journalist warning of Credit Suisse being “on the brink” triggered a social media-induced bank run, with client withdrawals totaling over CHF 61.2 billion (USD 68.6 bn) in the first quarter of 2023. Shortly after, in March 2023, rumors and financial speculation amplified across social platforms, fueling a series of depositor runs and culminating in the collapse of Silicon Valley Bank, Signature Bank and First Republic Bank in quick succession.

The financial and reputational impact of these digital threats grows more severe when considered against a global macroeconomic climate characterized by elevated levels of uncertainty, high interest rates and heightened geopolitical tensions. In May 2024, a Financial Stability Review published by the European Central Bank (ECB) concluded that, despite “reduced near-term recession risks,” the European financial climate remains fragile as “benign risk pricing in financial markets and structural liquidity vulnerabilities in non-banks harbor the potential for sudden shifts in market sentiment.”

Regulators Take Notice

Since the global financial crisis, a new set of banking regulations has been introduced. They are meant to not only improve banks’ resilience from regulatory capital, liquidity, risk management and governance perspectives, but also enhance banking supervision and revamp bank communication and interaction with regulators.

In Europe in 2014, the Single Resolution Mechanism (SRM) was implemented to ensure consistent decisions for the resolution of banks. In the past decade, the SRM has set out strategic goals and initiatives designed to mitigate against bank failures and other forms of market instability. The SRM 2028 Vision, unveiled in February 2024, introduced a fresh approach to operationalization and resolution testing. This new strategy also emphasizes improving crisis readiness and adaptability as critical to navigating an ever-evolving risk landscape.

In the future, a new set of risks arising from social media, cyber security, artificial intelligence (AI) and crypto assets are likely to accelerate and expand. The intersection of these risks will substantially impact banks’ ability to stay ahead of and effectively manage these risks. The timing is even more important as these risks can snowball in just a few seconds.

As such, it is not a surprise that the increasingly disruptive influence of social media discourse in molding market sentiment has not gone unnoticed by banking regulators worldwide. In January 2024, the ECB called on financial institutions to closely monitor social platforms for early signs of deteriorating sentiment that could indicate an impending depositor run.