Transferring cash from one account to another has become almost comically easy. “Moving money from a deposit to a money market fund can be done with a single mouse click without leaving your sofa,” write Columbia PhD student Naz Koont, Columbia’s Tano Santos, and Chicago Booth’s Luigi Zingales.

This ease of online banking has big implications for financial stability, they argue. At times when the federal funds rate rose in the past, depositors were slow to move their money out in search of higher interest. But as banks and brokerages have worked to make their services more accessible and convenient, they have reduced this inertia—and made banking less secure.

The researchers based their findings on federal banking data for 4,000 US banks between 2010 and 2022, tapping into separate research by Koont. More than half of the banks introduced mobile apps since the 2008–09 financial crisis, the data show. Koont, Santos, and Zingales’s analysis demonstrates that bank deposit patterns have become more closely linked to the federal funds rate, the benchmark set by the Federal Reserve.

When the Fed hikes rates, money flows out of deposits as consumers move money to higher-yielding products including money market funds and Treasury bills and bonds, according to the study. The researchers christen these flows bank walks, a slower-moving version of a bank run.

They document a divergence between deposits at banks with digital brokerages and those at banks without. Their estimation finds that an increase in the federal funds rate of 1 percentage point results in a 1.6 percent decline in deposits at traditional banks (those offering neither a highly rated mobile app nor a brokerage account). But at digital-broker banks, where customers can manage both deposits and other investments online, the drop was an even steeper 2.9 percent.

Deposits head for the exits

During 2022, the Fed raised rates by roughly 4 percentage points. The researchers estimate that such an increase leads to a 6.4 percent decline in deposits for traditional banks and an 11.6 percent plunge for digital-broker banks.

That’s one reason Silicon Valley Bank was in deep trouble in 2022, well before the March 2023 federal takeover, suggests the researchers’ analysis of deposit flows. Deposits started walking away in 2022 as the Federal Reserve raised interest rates, the data show.

SVB lost $25 billion of deposits, or 13 percent of its total. To compensate, the bank raised payouts, increasing its interest expense to $1.2 billion from $100 million over the course of the year.

The value of SVB’s deposit franchise might have been high enough in the past to make the bank solvent. But downgrading the market value of deposits in line with the new realities of online banking revealed that SVB’s assets were $5 billion less than liabilities, the researchers calculate.

“This example illustrates how more fragile the banking system has become and the additional challenges to monetary policy that digitalization brings,” they write, adding “SVB was the ultimate digital-broker bank.” Not only was it digital-first, but “its clients were precisely savvy tech entrepreneurs and investors. If there was a bank that was sensitive to the type of effects discussed in this paper, it was SVB,” they observe.

As digitalization expands and customers grow more accustomed to easily moving their money to greener pastures, the risks will become more diffuse. Bank regulators should take note, the researchers say, arguing that the existing framework for determining the value of bank assets needs an update. Anyone “counting on a high deposit franchise value when evaluating solvency might be relying on outdated estimates of deposit betas and outflows,” they write.

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