In the aftermath of the industry turmoil that erupted in March, much has been made about how social media heightens the risk of—and accelerates—bank failures. Some have even called it “Twitter’s first bank run.”
The uncertainty of Twitter’s future adds an interesting wrinkle to the discussion. Since Elon Musk bought Twitter last October, hundreds of thousands of users have bailed from the platform, raising questions about its relevance—or whether it will even continue to exist.
If Twitter were to go away, would that be good or bad for banks? Which ones? Could something replace Twitter? And does social media really make banks more susceptible to runs?
To answer these questions, I recently sat down with Sean Tuffy, the former head of market and regulatory intelligence at Citigroup and one of the most active finreg voices on Twitter. We also discussed the state of crypto, money market mutual fund reform, the issues with bank rescues, and much more.
What follows is our conversation, edited for length and clarity:
"A lot of media firms are questioning what Twitter means for media. It doesn't drive traffic as much as people think, but it’s still where the conversation happens, and it’s still highly trafficked by journalists."
What does Twitter mean for banks?
Banks need to manage it. Beyond that, I’m not sure. Things that happen on Twitter tend to take on an outsized importance. When SVB was happening, it was all over Twitter. At the time, I was at my parents’ house in Massachusetts. Outside of knowing it was happening, my parents didn't care.
A lot of media firms are questioning what Twitter means for media. It doesn't drive traffic as much as people think, but it’s still where the conversation happens, and it’s still highly trafficked by journalists.
When SVB happened, I was glued to Twitter—the VCs were begging for a bailout, while people like you kept tweeting things like “Cry harder.” Twitter is facing challenges, though. Is it dying? Will some banks be happy if it dies? Can it be replaced?
As a singular global hangout, I'm not sure Twitter can be replaced. There are many new social networks, but they cater to niches. My guess is that Twitter will stick around, but it won't be what it was. Part of that’s the new ownership under Elon, but it also isn’t a great business. As soon as it had to start worrying about revenues, it became a lot more challenging.
I’m guessing a lot of banks, media companies, and brands would be perfectly happy if Twitter became less relevant, because they wouldn’t have to engage in constant defense or offense on social media.
Some community bankers benefit greatly from it. Jill Castilla is a voice for community banking, and a big reason is because she uses Twitter very effectively. I doubt big banks will miss it, but I wonder if smaller ones will—and to what degree.
That’s fair. If you're a community banker, or a guy like me who posts finreg memes, there are many positives. I owe much of my career to Twitter. But for big banks and big companies, there's more downside than upside.
One media outlet branded you a “meme lord,” which I enjoyed. Do you put a lot of thought into your memes? Or are they mostly off the cuff?
They’re mostly off the cuff. I started doing memes to explain finreg in a humorous, lighthearted way, which is otherwise incredibly dry and tedious to explain. The thing about memes is that some land, but most don't. It's like baseball—a .300 batting average is really good.
What's your take on crypto? The SEC under Gary Gensler is more aggressive than ever. Bank regulators never really loved it, either.
The SEC has been always hostile toward crypto, and is even more so now. Banking regulators are obviously skeptical of it. If you look at the rules, they've instituted around essentially making it impossible to do propriety trading on crypto. They’ve raised the capital requirements so high no one would ever consider it. The CFTC has been more crypto-curious, which has led to some of the regulatory conflicts we're seeing at the moment.
A lot of regulators probably wish crypto would go away, but it’s unlikely that happens at this point. BlackRock has applied for a bitcoin ETF, and Europe has a regulatory framework for crypto assets. On a political level, there's a push to create crypto rules. Ultimately, we will end up with some form of regulation. The question is, how big will the market be once that happens?
Another point I’d make is that regulators haven’t gotten enough credit for keeping crypto out of the mainstream financial system. FTX’s implosion didn’t create the shockwaves it could have. Binance has huge outflows and is facing criminal charges and audits, but there's no real economic impact. Silvergate is an exception, but even in that case, the bank was overexposed to crypto clients, not crypto itself. These are good outcomes for regulators.
Could FedNow kill the case for crypto, considering that instant payments is part of crypto’s appeal?
No, but it does weaken the argument for it. Crypto was originally about creating a new financial system. Payments is more of an ex post facto justification for crypto. Another point is that if the Fed had taken payments more seriously 15 or 20 years ago, and if we’d addressed that problem with normal technology the way other countries have, many of the issues around crypto wouldn’t crop up so often. Much of the hype would've been diffused.
What about stablecoins?
Some may have objections about whether we should be creating another bank-like channel, which is valid. But regulating the creation and sale of a stablecoin is straightforward. It’s likely we’ll end up with stablecoin regulation before anything else. That said, because of the setup in the U.S., it could take a while to pass legislation. The medium-term horizon is regulation through SEC action—or CFTC inaction, depending on your worldview.
The SEC just rewrote the rules for money market funds for the third time in 15 years. Why has money market mutual fund reform been so difficult?
Central banks have always been the lender of last resort, but increasingly, at an international policy level, the thinking is that they're also the market-maker of last resort. That's what happened with money market funds at the start of the pandemic.
The SEC is trying to negate the implicit idea that money market funds are bank accounts. But the best way to do that is by letting a fund break the buck. It's similar to the situation with SVB and deposit insurance. The way you teach a lesson is by teaching a lesson. The real problem is that, in a crisis, it's as if there are no finreg principles. Lehman was the one time the regulators stuck by their guns, and that obviously wasn't a great result. It's hard to strike the right balance between punishing reckless behavior and maintaining stability.
It’s also hard to prove that a rescue or bailout wasn’t necessary after the fact. With SVB, the argument, like every other time, was that things would've been worse if uninsured depositors hadn’t been rescued. But who knows if that’s true?
Right. SVB was scary because bank runs are scary. SVB was not a small bank. It was over $100 billion in assets, with offices in eight countries. It wasn’t what it pretended to be. But you had these VCs, hedge funds, and tech startups claiming the economy was going to crater. They convinced policymakers they were facing payroll Armageddon. It shows the power of Twitter. You can’t prove a counterfactual, but that was one rescue we probably didn’t need.
It’s easier to bail out than not bail out.
I almost think it’s an unsolvable problem. It's hard to know what's too big, and yet, above a certain threshold, failure isn't an option. Also, once a bank is on a path to fail, it's basically impossible to stop it from failing. Regulators need to be able to look at early warning signs to determine whether a bank's in trouble. Because then the policy response can be different from some slipshod bailout at the 11th hour.
What other lessons did we learn from the failures of SVB, Signature, and First Republic?
I actually worry many regulators are learning the wrong lessons. Coverage ratios are important, oversight's important, and we should reassess whether the Fed is the best regulator for banks.
But politicians aren’t talking about these issues. They’re talking about how digital banking and social media make banks more susceptible to runs, which isn’t necessarily true. Then those arguments are used as a pretext for guaranteeing all deposits. There needs to be discipline in the banking system. Ensuring all deposits is an invitation for malfeasance and fraud.