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The effects of social media use by bank depositors

Author

Listed:
  • Jianglin Dennis Ding

    (Roger Williams University)

  • George G. Pennacchi

    (University of Illinois)

Abstract

A simple model is developed to analyze the effects of social media use by a bank’s uninsured depositors. While social media increases the likelihood of bank runs, it can be ex-ante beneficial to a bank by raising its shareholders’ equity. Social media enhances monitoring of a bank’s financial condition, thereby giving uninsured depositors a valuable option to withdraw early and avoid potential losses in states when a bank is likely to be insolvent. Recognizing this option, uninsured depositors require a lower promised interest rate that reduces the bank’s cost of funding at the expense of a greater liability for the bank’s deposit insurer.

Suggested Citation

  • Jianglin Dennis Ding & George G. Pennacchi, 2024. "The effects of social media use by bank depositors," Annals of Finance, Springer, vol. 20(3), pages 289-300, September.
    • Handle: RePEc:kap:annfin:v:20:y:2024:i:3:d:10.1007_s10436-024-00450-9
    DOI: 10.1007/s10436-024-00450-9
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    More about this item

    Keywords

    Social media; Bank runs; Deposit insurance;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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