“Don’t look now, but there’s something funny going on over there at the bank, George. I’ve never really seen one, but that’s got all the earmarks of being a run.”

In the 1946 film It’s a Wonderful Life, a crowd of people literally run to the bank to try to get their money out of the local institution that has failed. The film’s scene, set during the start of the Great Depression, illustrated something that many moviegoers of the time knew well from their own experiences.

Today, people do not experience runs like the one in fictional Bedford Falls. Since 1933, the Federal Deposit Insurance Corporation has been protecting most investors from losses when a bank fails. But runs on the bank still occur, and banks still fail because of them. But they look very different from the days of George Bailey and Mr. Potter.

In an article written with coauthor Jianglin Dennis Ding of Roger Williams University titled "The Effects of Social Media Use by Bank Depositors,” Gies Professor Emeritus George Pennacchi explores how current technology – particularly social media – can impact the actions of large uninsured bank depositors and lead to bank runs. The study was published Annals of Finance.

FDIC protections

Most bank depositors are protected through the FDIC up to $250,000. If you have deposits over that amount, those deposits would not be insured. For most people, this would not apply, but there are depositors with large amounts of money in banks who would understandably want to be sure nothing happens to those funds. So they tend to pay closer attention to a bank’s viability.

“These uninsured depositors are largely wealthy individuals, businesses, or other financial institutions,” Pennacchi explained. “They are more sophisticated than your typical depositor, because they have more wealth at stake.”

In fact, the FDIC was set up assuming that larger investors would be able to evaluate the bank's condition and decide whether it is a good bank to put money into. These more sophisticated and knowledgeable investors did not need the protection that the FDIC provides.

Social media use by depositors

These more sophisticated uninsured depositors have embraced technology as an aid in monitoring banks, and they have been able to share information through social media. Unlike our friends in Bedford Falls, they don’t need rumors or someone to tell them about problems at a bank.

“Social media can help uninsured depositors and other uninsured creditors of the bank communicate in ways that provide information not easily uncovered from regulatory accounting statements,” Pennacchi said. “They're in a better position to evaluate the bank, and they tend to be more sophisticated.”

One recent example of a bank run that was impacted by these types of depositors occurred in 2023 with Silicon Valley Bank in the San Francisco area. The causes of banking failures can vary, and the Silicon Valley Bank failure in 2023 resulted from the bank having too much invested in long-term US Treasury and mortgage-backed bonds. When the Fed increased market rates as part of their monetary tightening, the value of those bonds plummeted.

“Uninsured depositors were communicating over Twitter,” Pennacchi said, “and mulling over whether this bank was really solvent on a market value basis. Social media allowed the depositors to coordinate and say, ‘Gee, maybe we ought to get out of the bank. Maybe we ought to withdraw our deposits.’ And that's what practitioners and economists often refer to as a bank run.”

Book value versus market value

Banks often run into problems when their assets as reported on their financial statements, or “books,” do not match the market value of those assets. Even if banks follow accounting standards, their value may not reflect reality.

“For a lot of bank assets, their values are based on historical cost or book values that don't really reflect the current market value or fair value of the assets,” Pennacchi said. “But for people like uninsured depositors and stockholders, what they care about is the market value of assets.”

If a bank fails and is closed by bank regulators, the amounts recovered by uninsured depositors may depend on the liquidation value of the bank's assets or what a healthy bank is willing to value (pay for) those assets in order to acquire the failed bank. These asset values are based on market, not book, values.

Lessons for regulatory reform

It may be counterintuitive, but social media may benefit a bank's shareholders even though it makes runs by uninsured depositors more likely. By providing an escape valve that allows uninsured depositors to withdraw their money before the bank fails, they may be more likely to deposit their money in the first place and require a lower deposit interest rate paid by the bank. Yet while social media makes uninsured depositors less likely to suffer losses following a failure, the FDIC's cost of resolving the failure becomes higher. A possible consequence is that banks may have incentives to take excessive risks.

“This might be a good lesson that we need to reform bank regulation, making some of the accounting standards more transparent in the sense that they're based on fair or market values, rather than these opaque book values that don't really reflect the current reality of the bank,” Pennacchi said. “Doing so provides a clearer picture of a bank’s health and should lead bank regulators to intervene earlier to promptly correct problems before a bank is at high risk of failing.”