The do-it-yourself mentality in banking is having disastrous results.
Social media may not shoot, but it has the power to kill…
Credit Suisse’s collapse was the result of various factors, but the “trigger” for this banking “explosion” in Europe was a tweet.
Just in case, on October 1, 2022, Australian business journalist David Taylor of the ABC 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 bet it was Credit Suisse, Switzerland’s second largest bank. In fact, gossip went further and predicted his sudden death next weekend, writes Foreign Policy.
Is this a whole tweet?
On Monday, Taylor had deleted the tweet in question, but by the time markets opened that day, Credit Suisse stock had already lost 12% of its value. And the truth is that it has never recovered since, because despite the assurances of its administrators of sufficient liquidity, its depositors did not stop withdrawing their savings until the Swiss authorities were forced to force the another major Swiss bank, UBS, to accept its acquisition.
Credit Suisse has had problems for many years that are mainly attributable to it. Everyone knew it. 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 his own management, and more.
However, those familiar with the situation from the inside said that over the past year and a half, the situation has improved considerably. The bank’s management was stable, the financial situation had improved, and the scandals seemed to be over.
On March 19, during the absorption of Credit Suisse by UBS, Marlene Amstad, President of Finma, confirmed that the outflow of deposits and investments from Credit Suisse had been triggered by rumors that had been circulating since last fall. in direct reference to Australia’s controversial tweet. As Swiss bank president Alex Lehman summed it up, social media and digitalization had “harvested the flames of fear”.
Before and after
The previous banking crisis, in 2007-08, was a credit crunch. Bankers, spurred on by the adrenaline rush of the prospect of huge bonuses, have been playing with risky new products such as secured debt securities. At that time, there were few relevant regulations and no supervision. This time, however, it was not “red” loans that threatened some banks, but interest rate hikes by central banks around the world.
After the collapse of Credit Suisse, bets began to be placed on which other major European bank would follow the same path of destruction. The first name to hit the table was Deutsche Bank, but concerns quickly died down. Fifteen years after the last banking crisis, say finance insiders, European banking supervision has improved.
The rules are stricter than in 2007-08, so strict that European banks are now complaining that their “work” is being funneled into the unregulated shadow banking sector. “Banks, especially in Europe, are in better shape than 15 years ago,” says Nicolas Veron, banking expert at Brussels think tank Bruegel. “I don’t think we are in a banking crisis,” he said.
However, it is very true that people are said to be preparing for previous crises, without paying the slightest attention to new dangers. One such risk is the rise of social media, combined with the fact that customers these days conduct digital transactions 24/7. Before Credit Suisse, whose fate was sealed by a tweet, Silicon Valley Bank (SVB) across the Atlantic collapsed in just two days.
Silicon Valley Bank also stepped in
How did it happen? Fund managers advised their panicked clients to empty their accounts. These customers then shared their experiences on Twitter and WhatsApp, and within hours $42 billion of SVB’s coffers were gone.
The situation was “a banking sprint, not a banking panic,” Michael Imerman, a professor at the University of California, Irvine, told the Guardian at the time, pointing out 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 media is not just an event “camera” (i.e. a means of seeing what is happening around you), but rather a “engine”, which pushes the developments.
Social media drives stocks down
Proof of this is that, according to a group of US economists who studied the effect of 5.4 million tweets posted from 2020 until recently concluded, “negative returns (for bank stock prices) typically occur after periods of intense Twitter chatter.” .
Commenting on this, Charles Henri Monchaux, chief investment officer of the Swiss company Syz, referred to the… Ikea syndrome, that is to say do it yourself, but in the banking sector. In other words “why trust your bank when someone did a clever analysis on Twitter?”…
What proved fatal for Credit Suisse, Monchau said, was that the bank – like SVB – failed to realize that with the rise of social media, the “know your customer” principle ( banks follow their customers) has been reversed. “Today is ‘know your bank’,” he said: Customers are watching banks.