The Financial Stability Board is examining the role social media and technology may have played in fuelling recent market stress, including the failure of Silicon Valley Bank and the near collapse of Credit Suisse earlier this year.
Regulators such as the Federal Reserve and the Banque de France have already raised concerns that technology may have amplified and accelerated recent bank runs in the US and Europe. That includes the ability of depositors to withdraw funds rapidly using online tools, as well as the potential for worries surrounding individual firms snowballing on social media platforms such as Twitter.
Costas Stephanou, head of financial stability analysis at the FSB, told ISDA’s Annual General Meeting in Chicago on Wednesday that the global supervisory body is investigating recent examples and plans to publish a report later in 2023 or next year.
“It’s early days in terms of coming up with concrete results, but it’s very clear that social media may have played a role in the speed and the type of [bank] runs,” Stephanou said, referencing both SVB and Credit Suisse, which UBS bought in an emergency rescue.
“It’s about who ran, how did they run and where did they run? And compare that to what happened in previous cases of runs like in 2008. The next question is what has changed since then. And obviously technology and social media is the big one,” he said.
Other regulators flagged technology as an important area of focus at the ISDA event. Kristin Johnson, commissioner at the Commodity Futures Trading Commission, said the adoption of technology has played “a tremendous role in recent market events.”
“We’ve seen in this run on banks that there was something remarkably unique about the set of circumstances in March surrounding those two bank failures [of SVB and Signature Bank]," said Johnson. "We are beginning to unpack and deconstruct and appreciate how technology might accelerate activities and actions in this space."
Those comments echo recent statements from other global regulators. Banque de France governor François Villeroy de Galhau said in a late April speech that the increased speed of deposit outflows due to technology and social networks creates new challenges and he raised the prospect of making changes to deposit insurance or liquidity ratios.
Fed vice chair for supervision Michael Barr said in late March that the Fed is analysing a number of issues stemming from recent events including customer behaviour, social media and deposit runs. “We are considering the implications for how we should be regulating and supervising our financial institutions. And for how we think about financial stability,” he added.
The role of social media and technology in the banking crisis aren't the only areas in need of review following recent market stresses, according to other regulators speaking at ISDA’s AGM on Wednesday. “Hidden leverage” was discussed at length following the turmoil in UK Gilts market last year, when cash-strapped pension funds created a firesale in UK government bond markets as they sought to meet margin calls on swaps and repo positions.
“Leverage for sure has come... to the top of our agenda,” said Stephanou at the FSB. “The difficult question is how do you address this issue.”
Sarah Breeden, executive director for financial stability strategy and risk at the Bank of England, noted that hidden leverage surfaces as changes in market prices trigger margin calls. If individual institutions manage that process poorly, then it is “more likely to tip into a systemic event," she said.
“If everybody is well-prepared for this obligation to pay margin then we’re all fine. But our experience suggests that folks are not well prepared,” Breeden said, speaking on the same ISDA panel as Stephanou and Johnson.
Breeden emphasised the importance of robust stress testing to make firms more resilient. “It's not enough [for non-bank financial institutions] to think about their idiosyncratic risk… they need to think about what else will be happening in the market and be prepared in that context,” she added.
Johnson at the CFTC echoed regulatory concerns over flaws in risk management processes across markets.
“In the last year or so we have seen a significant number of illustrations that demonstrate [that] risk management failures at individual firms can have significant implications across the markets in which those firms operate, and across broader markets,” Johnson said.
She called for firms to have appropriate governance and accountability structures around risk management, rather than relying on central banks to intervene during times of market stress.
“Every entity [needs] its own first line of defence,” Johnson said. “I think we will see additional rulemakings in this space from the CFTC" and other international standard setters, she added.