Destabilizing Digital "Bank Walks"

We develop a model of “stickiness” of bank deposits to study the effect of digitalization on the size and duration of the value of the deposit franchise and, ultimately, on banks’ stability. The model predicts that digitalization increases the sensitivity of deposit levels and rates to changes in the Fed funds rate. We test these predictions using data on the U.S. banking sector, and find that, when interest rates rise, deposit outflows, or “walks”, and deposit rate pass-through are significantly larger at banks with mobile apps and brokerage services. We use these estimates to predict the effects of digitalization on bank stability. Digitalization has ambiguous effects on the value of the deposit franchise, depending on the magnitude of the reduction in the marginal cost of servicing deposits. Still, it unambiguously increases the deposit franchise duration, undermining bank stability.