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The Downside of Digitization 

The ease of banking through mobile apps has revolutionized how consumers manage money, but according to a recent study by researchers from Columbia University and the University of Chicago’s Booth School of Business, this convenience comes with significant risks for banks. 

The introduction of mobile apps has had a profound effect on the inertia of depositors, the researchers found via federal banking data, leading to a more direct link between deposit behavior and the federal funds rate set by the Federal Reserve. 

The study reveals that when the Fed raises interest rates, consumers swiftly move their money to higher-yielding products like money market funds and Treasury bonds, a phenomenon the researchers termed “bank walks,” a slow but steady version of the bank run. This trend is more pronounced among banks with digital brokerages, where customers can seamlessly manage both deposits and investments online. 

Silicon Valley Bank serves as a case in point. The bank lost $25 billion in deposits, equivalent to 13% of its total, during 2022 as the Fed hiked rates. This led to a surge in payouts, significantly increasing the bank’s interest expenses. And that situation contributed to the all-out bank run a year ago that drained $42 billion in SVB deposits in one day, prompting the bank’s failure and kicking off the liquidity crisis. (RMA and Oliver Wyman’s 2024 CRO Outlook Survey noted rising concerns over the “speed of risk.”)

This illustrates how the banking system has become “more fragile,” the authors wrote, “and the additional challenges to monetary policy that digitalization brings.” 

The researchers warn that as digitalization continues and customers become more adept at moving their funds, these risks will only grow. They suggest that regulators update their frameworks for assessing the value of bank assets and solvency risks to account for this new landscape.  

According to the study, banks “counting on a high deposit franchise value when evaluating solvency might be relying on outdated estimates of deposit betas and outflows.”