Destabilizing Digital 'Bank Walks'

36 Pages Posted: 2 Oct 2023

See all articles by Naz Koont

Naz Koont

Columbia University - Columbia Business School

Tano Santos

Columbia University

Luigi Zingales

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Date Written: May 8, 2023

Abstract

We study the impact of digital banking on the value of the deposit franchise and the stability of the banking sector. Using the classification of digital banking in Koont (2023), we find that when the Fed funds rate increases deposits flow out faster and the cost of deposits increases more in banks with a digital platform. The results are similar for insured and non-insured deposits. Using the model of Drechsler et al. (2023c), we find that correcting for digital betas and deposit outflows results in a deposit franchise value that is 40% lower for digital-broker banks relative to a traditional bank without digital platform. We apply this analysis to Silicon Valley Bank (SVB) and find that the reduced value of the deposit franchise explains why SVB was insolvent in early March 2023, even before the bank run occurred.

Keywords: banking, digitalization, deposit

JEL Classification: G21

Suggested Citation

Koont, Naz and Santos, Tano and Zingales, Luigi, Destabilizing Digital 'Bank Walks' (May 8, 2023). George J. Stigler Center for the Study of the Economy & the State Working Paper No. 328, Available at SSRN: https://ssrn.com/abstract=4443273 or http://dx.doi.org/10.2139/ssrn.4443273

Naz Koont

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

HOME PAGE: http://www.nazkoont.com

Tano Santos

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

Luigi Zingales (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-3196 (Phone)
773-834-2081 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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