Deposit Franchise Runs

Itamar Drechsler, Alexi Savov, Philipp Schnabl and Olivier Wang

No 31138, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We model a new type of bank run, a deposit franchise run. Banks pay below-market rates on deposits, which makes the deposit franchise a valuable asset. For a bank to keep this value, deposits must stay in the bank; if they leave, their value is lost to the bank. This makes the deposit franchise a runnable asset. Unlike Diamond-Dybvig runs, deposit franchise runs can occur even if the bank’s loans are fully liquid. Since the deposit franchise value increases with interest rates, a run is more harmful, and hence more likely, when rates are high. To avoid runs, banks can shorten the duration of their assets, but this can make them insolvent if interest rates fall. Avoiding both runs and insolvency requires additional capital in proportion to the value of the uninsured portion of the deposit franchise. We use our model to estimate deposit franchise values and show how to identify vulnerable banks in the context of the 2023 Regional Bank Crisis.

JEL-codes: E52 G12 G21 (search for similar items in EconPapers)
Date: 2023-04
New Economics Papers: this item is included in nep-ban, nep-cba, nep-fdg and nep-rmg
Note: AP CF ME
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Citations: View citations in EconPapers (6)

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