Aggregate deposit flightiness over time
This paper by Kristian Blickle, Jian Li, Xu Lu, and Yiming Ma examines how deposit sensitivity to interest rates fluctuates over time and impacts banking stability. The authors develop a dynamic banking model featuring heterogeneous depositors who differ in their valuation of deposit convenience benefits. Key mechanisms include:
- Depositor sorting: Those valuing convenience more remain in banks during outflows
- Switching costs: Create path-dependence in depositor composition
- Strategic complementarity: Fire-sale costs generate potential for runs when outflows exceed liquidity thresholds
Core datasets used
The study employs multiple comprehensive data sources to analyze deposit behavior. The primary dataset comes from Call Reports providing quarterly bank-level data for all U.S. banks from 2000-2023, including deposit volumes, deposit expenses, and balance sheet items, which serve as the main bank-level panel for deposit flows and rates. The Complex Institution Liquidity Monitoring Report provides monthly and daily data for banks with assets exceeding one hundred billion dollars from 2018-2023, breaking down deposits by counterparty and account type to identify growth and volatility patterns across corporate, retail, and non-operational deposits.
High-frequency transaction data covering over 1,400 depositories from 2015-2022 captures daily transactions, including intra-bank, inter-bank, and bank-to-investment cash flows per user, allowing the measurement of depositor-level flightiness. Additional macro data from FRED provides monthly information on Fed funds rates and reserve balances to control for macroeconomic conditions and identify quantitative easing and quantitative tightening periods.
Key empirical findings
- Time-varying deposit sensitivity
The research documents dramatic fluctuations in deposit flightiness from 2000-2023. Deposit flow sensitivity to interest rates remained near zero before 2008, increased during the financial crisis, declined around 2015, then spiked to record highs of 0.10-0.15 during 2020-2021. This pattern closely tracks periods of low interest rates and Federal Reserve balance sheet expansions. - Corporate deposit surge
During the COVID-19 period, corporate deposits grew over 60% compared to less than 40% for retail deposits, then contracted more severely during 2022 rate hikes. Corporate deposits consistently showed higher volatility than retail deposits, with coefficients of variation around 28% versus 20% for retail. - Individual depositor evidence
Transaction-level data from over 1,400 banks confirms depositor heterogeneity. Depositors frequently moving money between banks also show high propensities to move funds out of the banking system, with positive correlations across multiple flightiness measures.
Policy implications
- QE-rate hike interaction
Counterfactual analysis reveals that the same 2% rate hike generates vastly different stability impacts depending on prior QE implementation. Following COVID-19 QE that expanded deposits by 18.5%, a 2% rate hike increased default probability by 73 basis points versus only 40 basis points without prior QE. - Implementation speed matters
Gradual rate implementation significantly reduces financial stability risks. The same 2% total increase implemented as two 1% steps generates only 43 basis points of additional default probability compared to 73 basis points from a single 2% hike. This occurs because gradual adjustment allows flighty depositors to exit in manageable portions while preserving core depositors.
The Dynamics of Deposit Flightiness and its Impact on Financial Stability
Authors: Kristian Blickle, Jian Li, Xu Lu, Yiming Ma
From: Federal Reserve Bank of New York, Columbia University, University of Washington
Digital banking and depositors’ behavior
This working paper by Naz Koont, Tano Santos, and Luigi Zingales examines how digital banking has fundamentally altered deposit behavior and bank stability, with significant implications for monetary policy. The authors analyzed banks from 2010-2022, classifying institutions as:
– Digital banks: Those with mobile apps having 300+ reviews
– Broker banks: Banks offering brokerage services
– Traditional banks: Neither digital nor brokers
– Digital-broker banks: Offering both services
They used multiple approaches including time-series analysis, cross-sectional comparisons, and within-bank county-level analysis to isolate digitalization effects.
Key findings
- Increased deposit sensitivity
Deposits have become significantly more sensitive to Fed rate changes since 2010. A 100 basis point Fed rate increase now causes a 2.7% decrease in deposits relative to GDP, compared to only 0.5% in the 2000s. - Digital banks face greater outflows
During 2022’s rate hiking cycle, digital-broker banks experienced 11-19% differential drops in deposit growth versus 7.2% for traditional banks when Fed rates rose 425 basis points. - Higher deposit betas
Digital-broker banks showed higher “deposit betas” (0.44-0.46 vs. 0.39 average), meaning they had to raise deposit rates more aggressively but still lost more deposits. - Reduced deposit franchise value
The combination of higher outflows and betas reduced deposit franchise values for digital-broker banks by 14-22% compared to traditional banks, while also providing less natural hedging against interest rate risk. - Silicon Valley Bank case study
Applying their framework to SVB’s collapse, the authors found parameter ranges where SVB would have remained solvent as a traditional bank but became insolvent as a digital-broker bank, demonstrating how digitalization contributed to the bank’s failure beyond just the bank run itself. - Financial stability
Digitalization has made the banking system more fragile by reducing the natural hedge that deposit franchises traditionally provided against interest rate increases. - Monetary policy constraints
The Federal Reserve faces new limitations – it cannot afford aggressive rate hiking cycles because banks may become insolvent more quickly, reducing policy flexibility in fighting inflation. - Regulatory adaptation required
Traditional reliance on deposit franchise values for bank stability is diminishing, necessitating enhanced regulatory enforcement and new approaches to maintain system stability.
Destabilizing Digital “Bank Walks”
Authors: Naz Koont, Tano Santos, Luigi Zingales
From: Columbia Business School, University of Chicago
