The research paper titled "Destabilizing Digital 'Bank Walks'" by Naz Koont, Tano Santos, and Luigi Zingales examines the impact of digital banking on the stability of the banking sector and the value of the deposit franchise. The authors utilize the classification of digital banking from Koont (2023) and the model by Drechsler et al. (2023b) to analyze how digital banking affects deposit behavior.
Key findings include:
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Increased Sensitivity to Interest Rates: The paper demonstrates that, on average, deposits have become more sensitive to changes in the Federal Funds Rate over the last decade. This sensitivity is particularly pronounced for deposits in banks with digital platforms and those offering brokerage services, which facilitate customers' reallocation of savings to more remunerative investments without switching institutions.
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Deposit Outflows and Beta Analysis: The authors find that a 425 basis point increase in the Federal Funds Rate leads to differential deposit growth rates, with non-digital banks experiencing a 7.2% drop in growth, while digital banks with brokerage services see drops between 11.05% and 18.7%. Deposit outflows and rate increases are more pronounced in markets with higher internet usage, but only for digital banks, supporting the interpretation that digital banking has made deposits more sensitive to shocks in the Federal Funds Rate.
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Deposit Beta Impact on Value: The paper reveals that the beta of deposits for digital-broker banks is significantly higher, ranging from 0.44 to 0.46 compared to an average bank's beta of 0.39. This higher interest sensitivity, along with deposit betas, is crucial in determining the value of banks' deposit franchises. By considering both parameters, the authors estimate that correcting for differences in deposit outflows and betas results in a deposit franchise value that is 14-22% lower for digital-broker banks compared to traditional banks.
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Reduced Hedging Effect: Digitalization makes deposit franchises less valuable and less of a natural hedge against interest rate fluctuations. In digital-broker banks, deposit franchise values increase less than in traditional banks when interest rates rise, indicating that future digitalization could reduce the natural hedging effect that bank deposits provide against rate increases, thereby decreasing the banking sector's ability to engage in maturity transformation.
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Case Study: Silicon Valley Bank (SVB): The authors calculate the solvency of SVB prior to the deposit runs using both digital-broker parameters and traditional parameters, creating a hypothetical "traditional SVB." This analysis shows that the reduced value of the deposit franchise can explain why SVB was insolvent in early March 2023, even before the bank run occurred.
These findings highlight the potential risks and implications of digital banking on the stability of the banking sector and the valuation of deposit franchises, suggesting that future digitalization might lead to a less stable financial system in terms of interest rate risk management.
