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Deposit Franchise Runs

Author

Listed:
  • Itamar Drechsler
  • Alexi Savov
  • Philipp Schnabl
  • Olivier Wang

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.

Suggested Citation

  • Itamar Drechsler & Alexi Savov & Philipp Schnabl & Olivier Wang, 2023. "Deposit Franchise Runs," NBER Working Papers 31138, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:31138
    Note: AP CF ME
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    Cited by:

    1. Marcin Czaplicki, 2024. "Transmisja polityki pieniężnej poprzez kanał bilansowy banków. Przypadek Stanów Zjednoczonych," Bank i Kredyt, Narodowy Bank Polski, vol. 55(1), pages 21-54.
    2. Maurizio Trapanese (coordinator) & Giorgio Albareto & Salvatore Cardillo & Massimo Castagna & Riccardo Falconi & Gennaro Pezzullo & Luca Serafini & Federico Signore, 2024. "The 2023 US banking crises: causes, policy responses, and lessons," Questioni di Economia e Finanza (Occasional Papers) 870, Bank of Italy, Economic Research and International Relations Area.
    3. Michelangeli, Valentina & Piersanti, Fabio Massimo, 2023. "Interdependence between assets and liabilities in the banking system: Changes in the last two decades," Finance Research Letters, Elsevier, vol. 58(PA).
    4. Marco Cipriani & Thomas M. Eisenbach & Anna Kovner, 2024. "Tracing Bank Runs in Real Time," Working Paper 24-10, Federal Reserve Bank of Richmond.
    5. Carletti, Elena & Leonello, Agnese & Marquez, Robert, 2024. "Market power in banking," Working Paper Series 2886, European Central Bank.

    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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