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Digital banking, social media create a sticky deposit problem


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Digital banking, social media create a sticky deposit problem

US banks are shifting their deposits strategies after they were struck with a stark new reality about the stickiness of their deposits bases following the recent failures of three regional banks.

The rapid acceleration of digital banking in the past decade has benefited banks by allowing them to cut costs by trimming branches and head count. But the recent rapid failures of three regional banks painted a new picture of the risks of digital transformation for banks. Now, customers can move their money more quickly and easily than ever, and social media can only fuel the fire, leading to much faster runs on deposits.

After seeing the sobering reality of just how fast deposits can move after the failures of Silicon Valley Bank, Signature Bank and First Republic Bank, banks are adding new stress tests and risk disclosures and increasingly monitoring social media with a focus on association risk.

"Every bank out there is constantly thinking about what could a one- or two-day run look like," First Horizon Corp. CFO Hope Dmuchowski said at a recent industry conference.

Deposit dash

First Horizon is evaluating just that through new liquidity stress testing that evaluates rapid deposit outflows. "We really haven't done a stress scenario as an industry of what happens in a 24 hour, what happens in a 48 hour," Dmuchowski said. "Really, what happened to First Republic and Silicon Valley, I think, has us all rethinking how we think about those funds."

The company's new thinking about liquidity stress testing comes after the failures showcased "the amount of money that can leave your bank very quickly," Dmuchowski added.

The rise of online and digital banking now allows customers to move their funds around more quickly and easier than ever as people are now able to "bank [while] laying in bed," said Corbin Fox, assistant professor of finance at the James Madison University College of Business.

While it is convenient for clients, it can prove detrimental for banks in the event of a run.

That was the case for Silicon Valley Bank, which saw 25.3% of its deposits drain away on March 9, and another 60.2% in withdrawals were scheduled or expected on March 10, according to Federal Reserve data. Also on March 10, customers withdrew 20% of their deposits from Signature Bank. Both banks failed within days of the withdrawals gaining speed.

"I do not believe that any bank could survive a bank run of that velocity and magnitude," former Silicon Valley Bank CEO Gregory Becker told lawmakers at a recent Capitol Hill hearing.

The peak one-day withdrawal rates from both Silicon Valley Bank and Signature Bank were well above the figure for Washington Mutual Bank, the largest bank failure ever.

Chart titled Peak 1-day withdrawal rates for runs on the largest banks, by inflation-adjusted total assets, %

After these recent events, keeping an eagle eye on the flow of deposits within your institution is pertinent for banks, said Jim Adkins, managing partner at bank consultancy Artisan Advisors.

"Monitoring deposit inflows and outflows, as well as the velocity of deposit movements, not to mention employing customer and industry segmentation analysis," is a key action, Adkins said. "There should be a good deal of 'what if' analysis taking place."

Scanning social media

On top of the sheer speed at which deposits can move now, the explosion of social media is only exacerbating this issue for banks.

One study found an unprecedented number of tweets mentioning the banks that failed and words related to "run" and "contagion" between March 8 and March 13.

During that period, users posted over 6,500 tweets containing words related to "run" about Silicon Valley Bank, according to a study authored by James Madison University's Fox and a group of other academics. That was 5x the number of "run" related tweets regarding the next most discussed failure, First Republic Bank, according to the study.

Now, banks are hyperaware of reputational risk and are closely monitoring the social media universe.

"I know that a lot of community banks do a great job at responding to consumer complaints that are brought to their attention," said John Geiringer, a partner in the Financial Institutions Group at Barack Ferrazzano Kirschbaum & Nagelberg LLP, at S&P Global Market Intelligence's 2023 Community Bankers Conference. "But I think our community banks need to do a better job of doing outward surveillance to see what is being said out there in the social media ecosystem so they can be better prepared for the things that don't even come to them as complaints until it's too late."

Byline Bancorp Inc. already had a risk management group prior to the recent events, but the failures put that team on high alert.

"The headline of the events which took place put into action our incident response team out of an abundance of caution. And that meant that we met multiple days, multiple times a day to track social media, customer behaviors, liquidity guidelines, et cetera," Executive Chairman and CEO Roberto Herencia said on the company's first-quarter earnings call.

Recent events have also prompted banks to include new language about social media in their disclosures and forward-looking statements. One of those banks, Regions Financial Corp., added a statement reading "the effects of social media on market perceptions of us and banks generally" to its disclosures in April.

"As a normal course of business, companies across the industry update forward-looking statement disclaimers based on a variety of external factors and other considerations, said Jeremy King, senior vice president and media and public relations manager, in a statement. "We believe our disclosures speak for themselves as Regions operates with a strong balance sheet, a diversified business model, and a clear focus on soundness, profitability and growth."

Association risk

Banks are not only worried about their own social media presence, but also how their peers' social media reputation could impact their own. According to the study of tweets about the failed banks, there were more than 9,600 tweets posted that mentioned Silicon Valley Bank and contained words related to "contagion."

In the case of First Republic, former CEO Mike Roffler said his bank's demise was a result of being "contaminated overnight" as online panic spread following the other failures.

"At the end of the day, when the panic sets in, it's really hard to regain confidence," Roffler said on Capitol Hill.

First Republic Bank, which failed almost two months after Silicon Valley Bank and Signature Bank, experienced a slower deposit burn. The bank reported $104.47 billion in deposits at March 31, including a $30 billion infusion from the largest banks, down from $176.44 billion at Dec. 31, 2022.

Chart titled Total deposits at First Republic Bank

Association risk is now top of mind with reputation risk for BankUnited Inc.

"We always considered reputation risk as something to pay even more attention to," Chairman, President and CEO Rajinder Singh said on the company's first-quarter earnings call. "But we always defined reputation risk as stuff that happens to us and bad press about us and monitoring BankUnited on social media and so on. What I learned through this is that guilt by association is something you also have to worry about a lot. The company you keep, so to say."

Regulatory intervention

Though banks are working to address this new reality, some industry participants are urging regulators to step in.

"One of the things I would love to see the regulators do is to focus on who said what, what time, and what manner that contributed to the failure of these banks," said James Stevens, co-leader of the financial services industry practice at Troutman Pepper, in an interview. "If there's any way to hold those people accountable, that [regulators] do that."

Banks simply stepping up their social media monitoring may not be enough.

"You can control what you're doing inside the big bank building, but it is a far harder thing to control what people think of you outside," Matthew Bisanz, a partner with Mayer Brown's financial services regulatory and enforcement practice, said in an interview.