Democrats Want to Address Social Media Risks to Financial System

Legislation introduced aimed at monitoring role of digital platforms in spreading financial panic.

After a week of handwringing over recent bank failures, lawmakers and regulators were left with some very thorny issues.

Were regulators asleep at the wheel?

Did Republicans weaken rules that could have caught the bank collapses?

And how much of an impact did social media have on the fate of Silicon Valley Bank and Signature Bank?

House Financial Services Committee Chairman Rep. Patrick McHenry, R-N.C., called the problems at Silicon Valley Bank the “first Twitter-fueled bank run.”

Legislative Proposal

Now, Rep. Ritchie Torres, D-N.Y., has offered a solution.

On Wednesday, Torres, a member of the House Financial Services Committee, introduced legislation that would require the Financial Stability Oversight Council to monitor social media platforms for indications that there may be financial panic or a bank run. The bill, H.R. 2396, also would require FSOC to conduct a study to determine if social media platforms affect financial panic.

“We no longer live in the days where you have to physically go to the bank to withdraw money,” Torres said. “Digital platforms enable financial panic to spread on a scale and at a pace we’ve never before seen, and I worry it could enable a malicious foreign adversary to manufacture financial panic online to destabilize America’s financial institutions.”

Further Response

A researcher at the nonprofit global policy think tank RAND Corporation agreed that technology could speed up a bank run.

“SVB confirms that crises are unfolding faster,” Jonathan Welburn, a professor at the Pardee RAND Graduate School, recently wrote. “The next crisis—and there will be a next crisis—could take mere hours.”

Other policymakers acknowledged the quandary.

“Panic among certain bank clients provoked runs on the bank that were exacerbated by social media,” Senate Banking Committee Chairman Sen. Sherrod Brown, D-Ohio, wrote in a letter to the leaders of the Treasury Department, the Federal Reserve and the FDIC.

Letter to the Treasury Dept.

And, in a letter to Treasury Secretary Janet Yellen on Friday, Senate Banking Committee Democrats asked FSOC and its member agencies to identify risks and vulnerabilities revealed by the failure of Silicon Valley and Signature banks.

Those include qualitative risks “such as the influence of social media and algorithmic marketing on bank safety and soundness and consumer protection, and the related effect of financial stability.”

The Democrats also asked Yellen to have FSOC investigate “traditional” risks to the financial system, as well as evaluate the scope of liquidity backstops used by financial institutions.

NCUA board members and credit union trade groups have repeatedly called on Congress to renew pandemic-related provisions that made it easier for credit unions to join the agency’s Central Liquidity Facility.