Destabilisation of Bank Deposits Across Destinations – Assessment and Policy Implications

Abstract

Rapid and large deposit outflows from banks, their financial stability implications and possible regulatory and policy responses have regained attention in the context of the March 2023 demises of Credit Suisse, SVB and other regional US banks. Moreover, the possible introduction of CBDC or a marked success of stablecoins are perceived as additional clouds over the future of bank funding via (stable) deposits. While the bank run literature rarely pays attention to where bank deposits can flow to, this paper distinguishes the different destinations of bank deposit leakages as a starting point of the analysis. It explains the flow of funds mechanics across all possibilities and reviews for each the current (and prospective future) changes that may contribute to the observed increase of the speed and size of bank runs. Financial stability implications and policy options are outlined. While some of the factors that contribute to the increased volatility of deposits can and should be contained through policy measures, other, like the intensified competition between banks will inevitably stay, and bank balance sheet management and liquidity regulation need to accept the new normal of somewhat less stable and more expensive sight deposits.

Keywords: bank funding, bank runs, flows of funds, financial stability, liquidity crisis

JEL Classification: E42, E51, G21, G23