In a recent development that has taken place, the European Central Bank has asked certain banks to closely track activity on social media so as to detect a decline in sentiment, which could lead to a deposit run, as told to Reuters.
It is well to be noted that the European regulators have gone on to sharpen their scrutiny of banks’ liquidity following the collapse of Silicon Valley Bank as well as Credit Suisse in March 2023.
Banks can go on to run into financial trouble if clients rush to pull out deposits at the same time. In October 2022, a social media post from one of the journalists saying that a major international investment bank happens to be on the brink led to a run-on Credit Suisse, with certain clients withdrawing over 100 billion Swiss francs, or $116 billion, by the end of the fourth quarter of 2022.
The fact is that the speed at which clients yanked deposits has gone on to trigger a debate across the world on whether, under the present regulation, institutions can even withstand sudden liquidity shocks and whether some fresh rules might be needed.
In March last year, the European Banking Authority- EBA, which happens to be an independent European agency that goes on to carry out work in the banking as well as financial sectors, called on regulators who were relevant to evaluate the risks that included social media that could contribute to a decline in public perception as well as institutions reputation.
In response to the requests made by the ECB, which happened to be specific to certain banks in the region, a major European lender has arranged for a team so as to signal major volumes of negative posts to the bank’s treasury, which will therefore evaluate any impact on deposits.
Although much early detection might not be able to stop a bank run, regulators as well as banks are looking not to be caught off guard, as per the people familiar with the regulators’ thinking.
As per the ECB, social media enables information to penetrate faster but can also go on to trigger or amplify shocks. All this opens a new tab in its financial stability review in November.
The ECB has also elevated scrutiny of liquidity reporting in the months that have gone by, thereby shifting the regularity from being weekly to monthly.
The debate on liquidity
European regulators happen to be also debating whether the assumptions that are used to calculate the so-called liquidity coverage ratio- LCR, a major indicator that banks make use to measure liquidity risk.
Put forth after the 2008 financial crisis, LCRs need banks to hold sufficient assets that can be exchanged for cash so as to survive a period of major liquidity stress.
Regulators are also looking at the lenders’ individual deposit bases and also if cash can walk out at a better speed.
In Switzerland, authorities along with lenders are discussing novel measures that include an option to stagger a better portion of withdrawals for longer periods of time, Reuters had reported last November.
Reuters was being told by some bank executives that the measures that give an idea of how much liquidity a lender can go on to free up in one day may happen to be more effective than LCRs, which evaluate the access to cash across a 30-day period.
It is worth noting that larger banks should be needed to prove if they are able to rapidly access funds over the ultra-short term, one of the top U.S. banking regulators said recently.
The Basel Committee on Banking Supervision, which goes on to set benchmarks for the prudential regulation of banks, will go on to evaluate if some of its liquidity rules require amending after much faster outflows of deposits in the March crisis, partly because of the social media impact.
The Financial Stability Board, which happens to be an international body that goes on to track the international financial system, is looking into how deposit dynamics have changed and also at the role of social media, as it said earlier in the week.