Three banks in particular have shown an extraordinary insensitivity to popular fears: Silicon Valley Bank, Credit Suisse, and Wells Fargo. Two of these have paid a heavy price for their management’s inept handling of vital communications. But the third seems to have got away with it – this time. Next time, it might not be so lucky.Â
Exhibit 1: Silicon Valley Bank (SVB)
In the wake of Silvergate Bank’s failure, Silicon Valley Bank decided to restructure its balance sheet.Â
SVB’s decision to shorten the duration of its US government bond portfolio and raise more capital was eminently sensible, though far too late and nowhere near enough. But the market took it to mean the bank was in deep trouble. The bank had sold the securities before raising the capital, which gave the impression that it was desperately short of cash. And announcing a $1.8bn loss with only $500m of the capital raise needed to finance it guaranteed didn’t go down at all well with investors. The share price collapsed.Â
This is a fine example of what we might term the Peston effect. An announcement intended to reassure markets and prevent a bank run had precisely the opposite effect. And like a genie, once the announcement was out of its bottle it proved impossible to control. News that SVB was in trouble spread far and wide on social media, helped by powerful influencers whose motives for spreading it were perhaps less than entirely honourable.Â
Many have commented on the role of social media in the failure of SVB. And it is certainly true that the power of social media to amplify bad rumours contributed greatly to the extraordinary speed of the bank’s collapse. But if the bank’s management hadn’t sat on its hands until it was forced to act then made an utter horlicks of communicating its plans, there wouldn’t have been a bad rumour to spread, and the bank might still be standing today.
Exhibit 2: Credit SuisseÂ
Credit Suisse has a history of terrible communications. In October 2022, a rumour spread on social media that “a Globally Systemically Important Bank” was on the brink of collapse. At that time, Credit Suisse was about to embark on a major restructuring in the hopes of ending a long run of terrible investment decisions and major losses. Analysts, including the armchair variety, put two and two together and decided that the failing G-SIB was Credit Suisse. Bond yields slumped and shares sold off.Â
He really shouldn’t have used that phrase. Earlier that year, Do Kwon, owner/manager of the Terra stablecoin, had sent this tweet just before its crash in May 2022:Â
Twitter of course noticed the similarity and joked about Credit Suisse “deploying more capital”.Â
But worse, the phrase also resembled another Reuters headline, about the investment bank Bear Stearns:Â
Three days after the CEO’s statement, Bear Stearns collapsed into insolvency.
The hapless Koerner’s unwitting echoing of phrases from the past spooked the markets. The share sell-off intensified, bond yields fell to record lows, and CDS prices soared. As confidence in the bank slumped, customers pulled their funds. In the fourth quarter of 2022, some $88bn flowed out of the bank. At the end of October, Credit Suisse announced a major restructuring and 9,000 job cuts, financed by a rights issue of about CHF 4billion.Â
Wen collapse?
Exhibit 3: Wells Fargo
If you were running one of the US’s largest banks, would you see the worst US banking crisis since 2008 as an ideal time to announce your intention to issue lots more debt? No, me neither. But Wells Fargo’s management did. On Tuesday 14th March, as the flames rose round the US’s regional banks, it filed for a mixed shelf offering of up to $9.5 bn of assorted types of debt security.Â
If this was their intention, they largely succeeded. The shelf offering wasn’t even reported in the mainstream press. It was Seeking Alpha, of all places, that broke the news. But the problem with news being broken by fringe media is that it attracts fringe attention. As a result, there was something of a kerfuffle on Twitter from people who mistook the shelf offering for an emergency capital raise and thought it meant Wells Fargo was in trouble. Fortunately it doesn’t seem to have come to anything, but given how easily misinformation spreads on social media, this could have ended very badly for Wells Fargo – and blown up a much larger financial crisis than the one currently engulfing the US’s regional banks.Â
Careless talk costs money. Do better, bank executives.Â
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