Tools 30/05/2023

Is there a relationship between digital banks and interest rate rises that we do not see in the same way in traditional banks? Do they pass these rises on better or worse to the end customer?

To do so, we are going to look at the conclusions of two papers that have just been published and whose conclusions are quite clear.

The first paper entitled "Destabilizing digital "Bank Walks" reaches the following main conclusions:

1. Digitalization lowers the value of the deposit franchise, which has important consequences for financial stability.

2. When the Fed funds rate increases, deposits flow out faster and the cost of deposits increases more in banks with a digital platform.

3. The authors suggest that their findings are important because they speak to the sensitivity of bank profitability to interest rate changes and overall financial stability.

The implications of the findings in the paper are significant for financial stability and regulatory policy. Here are some possible implications:

1/ Regulators and bank supervisors need to be aware that banks may appear solvent based on the value of their deposit franchise, but digitalization can lower this value and lead to serious.

2/ The study suggests that digital banks may need to increase deposit rates to stem deposit flight during increases in the Fed funds rate, which could have implications for their profitability.

3/ The findings highlight concerns about the instability of deposit funding associated with the expansion and contraction of the Fed's balance sheet during QE and QT episodes, which could have implications for financial stability.

4/ The study suggests that additional regulatory measures may be needed to achieve financial stability in economies with shadow financial markets, where digital banking is more prevalent.

5/ The authors suggest that their findings have implications for both insured and non-insured deposits, which could have broader implications for consumer protection and financial stability.

The other paper, entitled "Monetary Policy Transmission Through Online Banks" concludes that digital banks pass on interest rate rises to deposits much faster than traditional banks.

Digital banks and interest rates

The conclusion should be: deposits come out faster but also pass on more profitability to the depositor in digital banks than in traditional banks.

In other words, digital banks suffer more from interest rate hikes but are more focused on their customers because they remunerate them accordingly.