Dynamic Competition for Sleepy Deposits

We examine the implications of sleepy deposits and their impact on competition, bank value, and financial stability in the US banking sector. We first document the shopping behavior of depositors using novel data on account openings and closures. Depositors infrequently shop for deposits, with 5–15% of depositors opening a new account each year. Shopping behavior is idiosyncratic: deposit accounts are more likely to be closed due to the depositor either moving or dying than because the depositor switched to a new account offering higher rates or better services. Building on these facts, we develop an empirical model of the supply and demand for “sleepy deposits.” In the model, banks face dynamic “invest-versus-harvest” incentives in competing for depositors who shop infrequently. We estimate the model and find that depositor sleepiness accounts for 58% of the average bank’s deposit franchise value. Sleepiness softens competition, particularly raising markups and franchise value for banks in low-concentration areas, as well as for banks with either low-quality deposit services or high marginal costs. Sleepiness also creates stability in the banking sector. For two main money center banks in the US, the probability of default after the Federal Reserve’s 2022-2023 hiking cycle would have increased to more than 20% in a counterfactual without sleepy depositors.