Social Media Is Now a Financial WMD

The collapse of the Swiss bank Credit Suisse in March had many underlying causes, but its trigger was a tweet. The bank’s failure was the clearest evidence yet that social media, in combination with digital banking, have become a major risk in the banking sector.

On Oct. 1, 2022, a Saturday, Australian ABC business reporter David Taylor tweeted that sources had told him a major investment bank was “on the brink.” He did not mention the bank’s name. The tweet went viral, soon appearing on Reddit, on which the ‘Wallstreetbets’ forum has 13.9 million followers. Next, rumors began to circulate that the bank in question could be Credit Suisse, the second-largest bank in Switzerland. Soon, news circulated everywhere that Credit Suisse would go bankrupt “next weekend.”

By Monday, Taylor had deleted his tweet. But when the markets opened that day, Credit Suisse shares plunged nearly 12 percent. The bank never recovered. Despite assurances it had enough liquidity and capital, clients kept emptying their accounts and selling shares until the Swiss authorities forced the other major Swiss bank, UBS, to take over Credit Suisse.

Credit Suisse had problems for years, largely of its own making. Everyone knew that. Over the years, the bank lost money and respect because of reckless investments in a hedge fund and finance company, excessive bonuses, a CEO spying on his own management, and so on. Still, insiders and analysts say that during the last year and a half, things had actually improved. The bank’s management was stable, the financial situation improved, and the scandals stopped.

On March 19, the day that Credit Suisse was taken over by UBS, Marlene Amstad, chief of Swiss financial regulator Finma, confirmed that what had led to cash withdrawals and disinvestments were “rumors since the autumn”—a reference to the Australian tweet. Credit Suisse chairman Axel Lehmann said social media and digitalization had “fanned the flames of fear.”

The previous banking crisis, in 2007-08, was a credit crunch. Bankers, driven by adrenaline and the prospect of huge bonuses, gambled with risky new products like collateralized debt obligations. There was little regulation and supervision. This time, however, it was not junk loans that unsettled some banks, but rate hikes by central banks all over the world.

After the collapse of Credit Suisse, speculation started that other big European banks would be next. Deutsche Bank, especially, was mentioned. But that nervousness has calmed down. Fifteen years after the last banking crisis, insiders in the financial sector say, European banking supervision has improved. Rules are stricter than in 2007-08, so strict that European banks complain that business is leaking into the shadow banking sector, which is barely regulated. Capital buffers are higher than before. Walls have been built between asset management and investment banking. Banks now have internalized control systems. “Banks, especially in Europe, are in better shape than 15 years ago,” says Nicolas Véron, a banking expert at Brussels-based think tank Bruegel. “I don’t think we are in a banking crisis.”

Yet there’s a reason people are said to prepare for previous crises, not paying attention to newly emerging risks. One such risk is the rise of social media, combined with the fact that, nowadays, clients are banking digitally 24/7. Credit Suisse’s fate was sealed by one tweet from the previous October. A little more than a week earlier, Silicon Valley Bank (SVB) collapsed within two days—a record time. Fund managers advised panicked clients to empty their accounts. Those clients then shared experiences via Twitter and WhatsApp. Within hours, SVB lost $42 billion, almost a quarter of all deposits. The situation was “a bank sprint, not a bank run,” Michael Imerman, professor at the University of California, Irvine, told the Guardian. “Social media played a central role in that.”

In recent years, there has been a drastic change in the relationship between banks and clients. Clients used to listen to bankers. Now, they get information from blogs and social media, sometimes reacting with one mouse click—from laptops or phones, sitting in restaurants, offices, or a taxi. According to British financial sociologist Donald MacKenzie, social media is not just a “camera” of events (that is, a way of looking at them) but rather an “engine,” spurring them on. A team of American economists who recently studied the effect of 5.4 million tweets posted since 2020 concluded that “negative returns [for banks’ share prices] emerge after periods of intense Twitter conversation.”

Charles-Henry Monchau, chief investment officer of Swiss bank Syz, described this as something of an Ikea effect: do-it-yourself, but in finance. “The wisdom of the tribes prevails,” he told me in an interview. “Why trust your bank when someone is doing smart analysis on Twitter?”

What proved fatal to Credit Suisse, said Monchau, is that the bank—like SVB—did not realize that with the rise of social media, the principle of “know your customer” (banks monitoring their clients) has been turned on its head. “Nowadays, it is ‘know your bank’,” he said: customers keeping an eye on banks.

Unlike UBS, one of the first major European banks to be hit during the subprime crisis of 2007-08, Credit Suisse escaped all trouble then. UBS was bailed out by the state. It downsized its investment bank and began focusing on wealth management for the world’s ultrarich. To regain trust, it profusely apologized to the public, actively communicating its new strategy. Meanwhile, Credit Suisse bankers boasted they were good and did not need reforms. While public opinion, even in Switzerland, became deeply hostile to banks, Credit Suisse actually expanded its investment bank. This hubris mentality produced several scandals in subsequent years—scandals that inside sources say have stopped by now and would not have killed the bank, if only its management had cared to communicate this to its clients. Because what did kill the bank, ultimately, was a lack of public trust. In the era of social media and digital banking, trust, once lost, is very difficult to regain.

A few examples illustrate this: Two years after the banking crisis, Credit Suisse CEO Brady Dougan (between 2007 and 2015) earned as much as 19 million francs a year (about $21 million) plus 71 million francs in bonuses. Many Swiss citizens, whose deposits and shares were wiped out, were outraged. Although Credit Suisse had lots of small Swiss depositors and shareholders, too, Dougan chose not to care. He wanted to play in the premier league of London and New York investment banks, said a former bank employee. “He would snip, ‘Why are people whining about my bonus when I saved their bank during the credit crunch?’” Dougan neglected the Swiss press, talking to Bloomberg and the Financial Times instead. He was abroad a lot.

His successor, Tidjane Thiam, had a similar attitude. He lasted nearly five years at the bank, until newspapers reported that he had hired detectives to spy on two internal rivals. After yet another series of disastrous front-page articles, Portuguese celebrity António Horta-Osório was hired. He resigned after nine months. He violated COVID-19 measures that the rest of Europe had to adhere to, flying to London to see his wife and go to Wimbledon during lockdowns. He also used a corporate plane for a holiday in the Maldives.

In 2014, Credit Suisse was fined $2.6 billion for helping American clients evade taxes. Later, it was entangled in money-laundering and corruption scandals. In 2021, the bank lost almost $3 billion with dubious investments in Greensill Capital, a financial services company that went bankrupt, and $5.5 billion with the hedge fund Archegos, which failed just weeks later. In all cases, the bank’s internal controls completely failed.

Early in April 2023, at the last Credit Suisse annual shareholder meeting in Zurich, an embittered former wealth manager (who had just been fired) spoke about his difficulties retaining customers during those years. According to someone who attended that meeting, he said: “I put more and more energy into that. But the bank management did nothing to help me.” During the same meeting, in a prepared speech, CEO Ulrich Körner apologized to shareholders. But he did not respond to emotional stories and spontaneous interventions by employees. “He sat there,” the former employee said, “stoically listening to painful stories by his own people, not saying sorry even once.”

This shows, the former employee said, that corporate leaders often have no idea how much impact they have nowadays. That applies not only to the flamboyant executives at the helm of Credit Suisse over the past two decades. It also applies to Körner, who took office in the summer of 2022 to clean up after the scandals. Körner, a German-Swiss, was known as a data person. On balance his reputation as a leader was positive; he earned the nickname “Uli the knife” because of his tough reforms during a previous job at UBS, but he was not a notably adept communicator.

That became evident after the Twitter storm in October. Körner assured the world that Credit Suisse had enough liquidity and capital buffers. This did nothing to stop the bleeding. Clients and shareholders were panicking and losing trust in the bank. Apart from quarterly results, they needed a narrative. That narrative only came after a month, in the form of a restructuring plan using—again—mainly data and spreadsheets. It did not do the trick. In the fourth quarter of 2022, customers withdrew 110 billion francs from Credit Suisse accounts.

Körner never publicly apologized for the mess his predecessors had left behind, not even as a way to distance himself from the past and mark a new beginning. In a hard-hitting piece on Körner’s silence, the Neue Zürcher Zeitung recently wrote that he and chairman of the board Axel Lehmann, cut of the same nerdish cloth, had overlooked the one factor “that cannot be measured, and that ultimately felled Credit Suisse: trust.”

Today, banks need emotional intelligence as well as financial results to weather storms, the newspaper wrote. When Körner was asked on Swiss television recently why he had not responded immediately to the Australian tweet, he replied he had responded. But not on social media, the journalist insisted. “No,” Körner said, “we did not have the expertise for that.”

According to Clarissa Haller of the public relations agency Dynamics Group in Zürich, Credit Suisse’s mistakes are “a wake-up call.” Banks need communicative leadership, she said. They need to build a network of online ‘influencers’ they can mobilize when a tweetstorm hits. Now, banks mainly use social media to advertise services and products. But with companies’ reputations being shaped and destroyed there, they must learn to use those media to engage and listen. “What happened to Credit Suisse,” Monchau said, “could happen to any bank. Get used to it. Especially in countries where deposits are not well insured.”

There are signs that the banking world has taken notice. In March, during a hearing in the European Parliament, European banking supervisor Andrea Enria, who oversees Europe’s 120 largest banks, warned about the impact of social media. During the same week, European Central Bank President Christine Lagarde, in a meeting with European heads of state and government, mentioned mobile banking and social media as a new risk factor. Some suggest authorities should respond by opening emergency windows at central banks 24/7 (not just during office hours) and restricting the speed of outflows during a crisis.

Interestingly, when asked which bank could serve as an example, dealing with social media responsibly, some observers mentioned UBS. At the same time, in Switzerland and abroad, skepticism is mounting on UBS’s ability to incorporate Credit Suisse—a huge operation. Still, the fact that UBS recently brought back Sergio Ermotti as CEO was generally seen as a sign the bank is aware of the new risk. Ermotti was, after all, the man who managed to get UBS back on its feet after the credit crunch. He restored confidence in UBS by publicly and repeatedly apologizing; by drawing up a drastic, credible reform strategy; and, last but not least, talking about it all the time. And this was even before social media became dominant.

Time will tell whether Ermotti will be able to do this again. But given that social media will be sure to test him, that time will probably come soon.