Destabilizing Digital “Bank Walks”

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.