Negatives news on social media can trigger systemic default for banks—IMF

The International Monetary Fund has buttressed how negative news on social media can trigger a systemic default for larger banks due to a failure of a small bank.

The IMF Monetary and Capital Markets (MCM) department which started this during a press briefing at the Spring Meetings at the Fund’s headquarters in Washington DC, USA, said the recent banking turmoil has demonstrated the growing influence of mobile apps and social media in spreading sudden financial asset allocations.

“Negative sentiments about SVB on social media surged, and its stock sold off precipitously, likely intensifying the deposit run the bank faced.”

“In the banking sector, recent events in the United States have been a reminder that funding can disappear rapidly and even events at smaller banks can have systemic implications by triggering widespread loss of confidence and rapidly spreading across the financial system, amplified by technology and social media.”

The IMF department opines social media-driven banking apps make it easy for customers to withdraw deposits from banks hastening a bank run and worsening a situation that could have been contained.

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Nearly all banks in Nigeria have mobile banking apps and they all facilitate quick withdrawal of deposits often in seconds.

Tobias Adrian, the Financial Counsellor and chair of the department also responded to questions about the growing influence of Cryptocurrency and if it has any negative consequences for financial market stability.

He responded that there was a positive correlation between equity valuation and crypto markets but did not see any immediate threat to financial market stability.

“In general, only a limited spillover from the crypto universe into the financial sector.”

The IMF also suggests the threat to banking stability is high for frontier markets, especially in sub-Saharan Africa due to lower credit ratings.

“For frontier economies and emerging markets with lower credit ratings, the situation is more worrisome. While sovereign spreads of the investment-grade emerging markets have remained stable, those for frontier economies and high-yield emerging markets widened to crisis levels following these recent events. Additional countries have likely lost market access and debt distress pressures have become more pronounced”

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This suggests the poor debt ratings of frontier markets have made access to foreign debts expensive and unattainable.

Nigeria’s central bank however opines that the 600 basis hike in interest rates in the last year has not affected banking stability.

“It noted that whereas MPR was increased by 500 basis points in Nigeria, from 12.5 percent in 2022 to 17.5 percent in January 2023, the Financial Soundness Indicators (FSIs) in Nigeria show that the Nigerian banking system remains resilient due largely to the stringent prudential guidelines put in place by the CBN which has resulted in a strong build-up of not only the Cash Reserve Ratio (CRR) in Nigeria but also the Liquidity Ratio and Capital Adequacy Ratio.”