Key highlights
- IMF’s MCM department warns that social media and mobile banking apps can hasten banking turmoil by spreading sudden financial asset allocations.
- Negative information about banks can quickly spread on social media, leading to a contagion that might not be stopped soon enough.
- The IMF also suggests that the threat to banking stability is high for frontier markets, especially in sub-Saharan Africa due to lower credit ratings.
Social media and mobile banking apps are believed to have a growing influence in hastening banking turmoil by spreading “sudden” financial asset allocations.
This is according to IMF’s Monetary and Capital Markets (MCM) department which made this remark as part of its press briefing at the Spring Meetings taking place at the Fund’s headquarters in Washington DC, USA.
According to the fund, “the recent banking turmoil also demonstrated the growing influence of mobile apps and social media in spreading sudden financial asset allocations. Word of deposit withdrawals spread globally at lightning speed, potentially signaling that future banking stress may spread faster and be less predictable.”
The MCM also suggested the uniquity of social media also means negative information about banks can spread quickly on social media leading to a contagion that might not be stopped soon enough. It cited the case of SVB as a classic example.
“Negative sentiments about SVB on social media surged, and its stock sold off precipitously, likely intensifying the deposit run the bank faced.”
It also buttressed how negative news on social media can trigger a systemic default for larger banks due to a failure of a small bank.
“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.”
What this means?
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.
Nearly all banks in Nigeria have mobile banking apps and they all facilitate quick withdrawal of deposits often in seconds.
Nigeria’s central bank governor Godwin Emefiele assured Nigerians that Nigerian banks were sound after a stress test showed they passed prudential guidelines. He mentioned that at the last MPC meeting in March. Emefiele also noted that he will rather wipe out shareholders than allow any banks to fail in Nigeria.
He also stated that no depositor has lost any money to any failed bank since 2003 claiming that Nigeria’s banking resolution process has protected bank depositors.
Is Crypto a risk to banking stability?
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.”
IMF worried about Frontier markets
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”
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.”
