Deposit Franchise Runs

Abstract

The deposit franchise is valuable because banks pay below-market deposit rates. However, if depositors leave, its value vanishes. This can trigger runs by uninsured depositors, even if banks hold fully liquid assets. Because the franchise value increases with interest rates, runs are more harmful, and hence likelier, when rates are high. Banks can deter runs by shortening asset duration, but this risks insolvency if rates fall. Avoiding both runs and insolvency requires capital covering the potential loss of the uninsured deposit franchise. We estimate deposit franchise values and use them to identify vulnerable banks during the 2023 regional bank crisis.