How bots and short sellers brought down First Republic Bank

Bots and fake accounts are spreading disinformation about First Republic Bank, causing it to withdraw $100 billion in deposits and drive down its stock price until it becomes the second-largest bank failure in U.S. history, according to a new report.

Valent Technologies used AI technology to investigate online activity during last year’s banking crisis, which began with the collapse of Silicon Valley Bank in March.

That was followed by an unusual flurry of tweets and Reddit posts from bots targeting First Republic, which analysts believed was on firmer financial footing, coinciding with a collapse in confidence that saw depositors withdraw their money.

And researchers concluded that short sellers likely used this strategy to bet against the bank’s stock price and reap huge profits when it fell in value.

Analysts say it is not an isolated case. Just as bots are used to spread political disinformation, they can also be used for financial gain.

Amil Khan, CEO of Valent Projects, said: “First Republic Bank crashed despite no significant change in fundamentals.

“The only thing that changed was the way it was perceived, and how those perceptions were manipulated to ensure that savers collected $100 billion in a few weeks.”

Its analysts have examined the spread of disinformation by bots, identifying, for example, how religious extremists in India could fuel street violence in Britain by spreading false rumors.

For their latest report, they turned their attention to last year’s banking crisis.

The collapse of the First Republic occurred amid widespread panic over the health of regional banks.

At the time it was seen as a model financial institution. The comfortable branches served warm cookies and catered to a wealthy and powerful clientele.

The wealthy customers rarely defaulted on loans and kept the bank afloat with deposits.

Things changed with the collapse of Silicon Valley Bank and then Signature Bank in March. The savers withdrew money from Silicon Valley Bank because they were afraid that high interest rates would threaten the bank’s solvency. On March 10, federal authorities took control of the bank.

That panic quickly spread to Signature Bank, which relied on cryptocurrency customers, creating a new level of risk. It was closed by New York regulators on March 12, although several branches later reopened as part of Flagstar bank.

With two regional banks failing, attention turned to San Francisco-based First Republic. The country had also suffered paper losses as interest rates rose.

And like other smaller banks, billions of dollars in deposits were uninsured. That didn’t worry customers until the collapse of other banks sent panic throughout the industry.

On May 1, 2023, most of its business was sold to JP Morgan by federal regulators.

The former CEO has always said the only problem was that the company had been ‘infected’ by a wave of fear.

And the Financial Times editorial writers concluded: ‘The bank faced a few years of poor earnings but might have survived had it not had a run on its deposits.’

Valent Projects discovered that the hysteria was not organic.

The AI-powered algorithm found that there was an increase in social media activity on March 11, coinciding with an increase in ‘short positions’ against the bank as traders bet the share price would fall.

But the increase in posts was not accompanied by an increase in corresponding engagement (such as likes, retweets, or replies).

“This is highly anomalous compared to organic trends on social media and raises red flags about the authenticity of the activity,” the report says. “This pattern is unlikely to occur naturally.”

The increase was caused by bots.

Such a scenario, the report concludes, is the result of a “calculated effort to shape public perception and influence real-world outcomes, such as withdrawing deposits from First Republic Bank.”

That’s exactly what happened, with the bot activity coinciding with the run on deposits and the collapse of the share price.

Signature Bank, on the other hand, saw a surge in bot activity in the wake of its stock price collapse.

Timothy Coffey, a banking analyst at Janney Montgomery Scott, said the report explained what he saw at the time.

“There were a lot of rumors going around about the bank, many of which were unfounded because the company did not announce results during that period,” he says.

“But that didn’t stop rumors of deposit outflows from flying around.”

James Knight, a cybersecurity expert at Digital Warfare, said the practice was widespread.

“Bot play is used for political power games, to sway public opinion, and of course for financial gain,” he said.

‘It is carried out by governments and organizations that use these methods for financial gain. For example, by shorting a stock and then launching bots to share something negative and cause the share price to fall.’

The result should be a wake-up call for a sector that is highly vulnerable to investor and customer confidence.

Fergus McKenzie-Wilson, chief technology officer of Valent Projects, said: ‘The response capabilities of bank officials and regulators are being outpaced by bots, fake accounts and the unseen forces that orchestrate them.

“The story of First Republic Bank is a warning to the financial industry; strong fundamentals are no longer the guarantee they once were.’