Regulators cite social media played role SVB collapse while reviewing banking regulation

Yahoo Finance’s Allie Canal joins the Live show to discuss how social media played a major role in the collapse of Silicon Valley Bank.

Video Transcript

DAVE BRIGGS: OK, the collapse of Silicon Valley Bank raising new questions surrounding the role of social media in one of the largest US bank runs on record. Yahoo Finance's Allie Canal here with the details. Allie, nice to see you.

ALEXANDRA CANAL: Nice to see you. Yes, social media, this modern-day wrinkle on what otherwise was a very classic bank failure. We heard from Jerome Powell last week saying that management failed badly in the years leading up to SVB's demise. But still despite that mismanagement-- we did hear earlier today from Federal Reserve Vice Chair Michael Barr speaking in front of the Senate Banking Committee. He said that modern communication dynamics were at the heart of this collapse, particularly how fast this all occurred.

In his written testimony he wrote, quote, "social media saw a surge in talk about a run, and uninsured depositors acted quickly to flee. Depositors withdraw funds at an extraordinary rate, pulling more than $40 billion in deposits from the bank on Thursday, March 9." And that panic is what ultimately led to the collapse of the bank on Friday, March 10.

We also heard from FDIC Chair Martin Gruenberg. He echoed Barr's view in his own testimony on Tuesday. Here's a quote. He said, "One clear takeaway from recent events is that heavy reliance on uninsured deposits creates liquidity risks that are extremely difficult to manage, particularly in today's environment where money can flow out of institutions with incredible speed in response to news amplified through social media channels."

And this also speaks to the rise of mobile banking, the advancements that we've seen in those digital tools like self-service money management where the transfer of cash and information, it's just at the quickest pace that we've ever seen. And because of all of that, it's a clear game changer. That's an actual phrase used by Citigroup CEO's Jane Fraser. She described that last week while speaking in an interview when it comes to the future of social media. She, along with other regulators, seem to be all on board right now that concrete structural changes are needed, especially in regards to social media moving forward.

SEANA SMITH: Yeah, and speaking of some of those structural changes that could maybe potentially be on deck, it's interesting when you take a look at how Fed Chair Jay Powell has reacted to this because in the press conference last week following the Fed's decision, he reiterated time and time again that he thinks the banking sector is sound and resilient. How do you see this impacting maybe the Fed's policy here down the line?

ALEXANDRA CANAL: Well, he did mention that there will be a full Fed review that will be released on May 1. I think we're going to get more clear messaging when it comes to potential regulatory reaction from this.

But Fed Chair Jerome Powell, he did speak specifically about this banking failure last week. Here's a little bit more of what he had to say.

JEROME POWELL: Silicon Valley Bank management failed badly. They grew the bank very quickly. They exposed the bank to significant liquidity risk and interest-rate risk, didn't hedge that risk. We now know that supervisors saw these risks and intervened.

We know that SVB experienced an unprecedentedly rapid and massive bank run. So this is a very large group of connected depositors-- concentrated group of connected depositors in a very, very fast run, faster than the historical record would suggest.

ALEXANDRA CANAL: So Powell really focusing on that speed, the speed at which this really unraveled. That is largely what's going to lead to regulatory review down the line. What tangible policies will be in place, we don't know at this point. I think this will be an ongoing conversation, and social media is going to be a very heavy part of that for even stress testing moving forward. Potentially that could be a thing as well.

SEANA SMITH: Yeah, massive. All right, Allie Canal, great stuff. Thanks so much.