Bank regulators assume that deposits are sticky, meaning they don’t move around much. But digital banking is changing that. New research, described in a blog (link below) by Koont, Santos, Zingales shows how mobile apps make deposits less stable.
🐦🔗: https://n.respublicae.eu/lugaricano/status/1643340847298281473
More than half of the banks have introduced a mobile app. Figure 1 shows shows the quarterly average growth in core deposits, computed separately for digital and non-digital banks. Digital banks start experiencing deposit outflows in the third quarter of 2022.
🐦🔗: https://n.respublicae.eu/lugaricano/status/1643340849814847490
From April 2022, when the Fed started raising rates, $860 billion of deposits left the banking sector, mostly into money market funds. Two-thirds of this happened before SVB collapsed. This is a silent walk that can’t be stopped by deposit insurance.
🐦🔗: https://n.respublicae.eu/lugaricano/status/1643340852599857152
Where is the money going?
Figure 2 reproduces Figure 1 but now split into four groups: Digital and non-digital and banks with brokerage fees versus those that don’t report these fees.
🐦🔗: https://n.respublicae.eu/lugaricano/status/1643340854860587008
Banks with neither an effective mobile app, nor a brokerage account see their deposits grow at a steady 1.5% rate in the third and fourth quarter of 2022. By contrast, banks with both a functioning mobile app and a brokerage account see their deposits drop by 2% in Q4 2022.
🐦🔗: https://n.respublicae.eu/lugaricano/status/1643340857339432960
Huge implications in my view (not authors'!):
- Not a run: not about deposit insurance.
- No reason for HTM exception. Banks must mark-to-market their assets.
- Fed faces new challenges in controlling inflation without crashing the economy.
Link: https://www.promarket.org/2023/04/04/destabilizing-digital-bank-walks/
🐦🔗: https://n.respublicae.eu/lugaricano/status/1643340862225801217
In the companion paper, the authors find that a 400bps increase in the fed funds rate, roughly what the Fed increased rates in 22, leads to a 9.6% drop differential relative to trend in deposit growth for non-digital banks without brokerage fees and 15.2% with brokerage fees.
🐦🔗: https://n.respublicae.eu/lugaricano/status/1643340859713396736