Destabilizing Digital "Bank Walks"

53 Pages Posted: 11 Jul 2024

See all articles by Naz Koont

Naz Koont

Columbia University - Columbia Business School

Tano Santos

Columbia Business School; National Bureau of Economic Research (NBER)

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)

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Date Written: July 10, 2024

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 that offer a mobile app and brokerage services. Using the model of Drechsler et al. (2023b), we find that correcting for digital betas and deposit outflows results in a deposit franchise value that is 14-22%lower for digital-broker banks relative to traditional banks. Moreover, we find that digital-broker banks’ deposit franchise values increase by less when interest rates rise, serving as less of a hedge. We apply this analysis to the case of Silicon Valley Bank (SVB) and find that the reduced value of the deposit franchise can explain why SVB was insolvent in early March 2023, even before the bank run occurred.

JEL Classification: G21

Suggested Citation

RPS Submitter, Becker Friedman Institute for Economics and Koont, Naz and Santos, Tano and Zingales, Luigi, Destabilizing Digital "Bank Walks" (July 10, 2024). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2024-79, Available at SSRN: https://ssrn.com/abstract=4891224 or http://dx.doi.org/10.2139/ssrn.4891224

Naz Koont

Columbia University - Columbia Business School ( email )

Tano Santos

Columbia Business School ( email )

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Luigi Zingales (Contact Author)

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