## krogstrup

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**Canonical URL:** [krogstrup](https://www.imf.org/-/media/files/publications/fandd/article/2024/03/krogstrup.pdf)

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### Overview
- Focus: how advancing digital frontiers (AI, social media, mobile banking, instant payments, CBDCs) affect the frequency, speed, and containment of bank runs.
- Context: sudden withdrawals contributed to failures of Silicon Valley Bank, Signature Bank, First Republic Bank (United States) and Credit Suisse (Switzerland) in the spring of 2023.
- Key observation: "While the future impact of AI and tech innovations in banking is uncertain, it is possible to imagine that the frequency of bank runs may increase significantly."

### Mechanics and speed of bank runs
- Definition: A bank run occurs when many customers simultaneously withdraw their deposits because they are worried about the bank’s financial health.
- Insured vs uninsured: Some deposits are insured through national deposit guarantee programs; uninsured deposits may be withdrawn when there are concerns about a bank’s health.
- Funding model risk:
  - Banks fund lending mainly with deposits and keep only a fraction to meet withdrawals.
  - If depositors withdraw en masse, the bank may not have liquid funds because deposits are tied up in longer-term lending.
- Time dimension:
  - Slow withdrawals allow time to secure funding or sell assets.
  - Fast withdrawals can bring down a bank before it secures funding alternatives.
- Historical note: speed of withdrawals in 2023 was unprecedented compared with earlier episodes (e.g., global financial crisis) due to social media and mobile banking apps.

### Technology effects: AI, social media, mobile banking, instant payments
- Channels increasing withdrawal speed:
  - Social media: spreads rumors rapidly, contributing to speed of customer actions.
  - Mobile/online banking: makes it easier to transfer money 24/7 and reduces frictions to switching banks.
  - Instant payment systems: increase access to cheap instant transfers and reduce time to move money between banks.
- AI-specific risks:
  - AI-powered tools can analyze large data sets at high speed (terms and conditions, social media, traditional media).
  - Future AI tools may automatically and instantly reallocate deposits across banks per customer-set criteria (interest, perceived bank safety, diversification).
  - Regulatory constraints like know-your-customer requirements "may not prevent AI-powered tools from opening accounts on behalf of a customer" once customers upload documents and mandates.
- Behavioral change:
  - Digital relationships may reduce personal banking relationships and customer loyalty, accelerating outflows.

### Mitigations and trade-offs ("Fighting tech with tech")
- Technology-based mitigants:
  - AI tools to improve liquidity management and monitor withdrawal patterns.
- Balance of structural mitigants and their side effects:
  - More equity financing or more liquid assets on banks’ balance sheets:
    - Benefit: can be used quickly to repay depositors.
    - Cost: could reduce lending to households and businesses; shift financing to equity or long-term borrowing; affect central bank and government balance sheets; affect asset prices due to higher demand for safe liquid assets.
  - Expanded deposit insurance:
    - Benefit: reduces run risk.
    - Cost: financing high coverage could impose high costs on the public purse; a sufficiently large prepaid insurance fund may be difficult to establish; can create moral hazard by weakening banks’ incentives to behave prudently.
  - Extended access to central bank emergency lending:
    - Benefit: provides liquidity in crises.
    - Cost: places central bank at risk of financial loss; may lead to risky bank behavior or disrupt the interbank loan market.
  - Recovery and resolution regimes:
    - Role: restore confidence after a failure to avoid contagion.
- Principle: "Each tool can have undesirable side effects that should be balanced against their benefit of reducing risks."

### Central bank digital money (CBDC) implications
- CBDC mechanics:
  - CBDC would allow households and firms to convert commercial bank deposits into deposits at a CBDC account at the central bank.
  - Deposits at the central bank would "in most cases be considered very safe."
- Risk shift:
  - CBDCs might transform runs from runs between commercial banks to runs from commercial banks to the central bank's balance sheet.
  - If unconstrained, customers might shift all money to the central bank from a perceived-risky commercial bank, increasing or exacerbating bank runs.
- Policy response:
  - Some central banks considering CBDCs are contemplating constraints on how much a household or firm can deposit in a CBDC account.
- Limitations:
  - If future technology substantially increases the speed of deposit withdrawals, "the speed of bank runs may be unaffected by the presence of even unlimited CBDCs."

### Key policy guidance and conclusions
- No silver bullet: Multiple available tools exist, but none eliminate run risk and each has trade-offs.
- Need to adapt: Given unpredictable technological breakthroughs and uptake, authorities should:
  - Follow technological developments closely.
  - Consider how best to adjust the toolkit balancing risk reduction and adverse side effects.
- Central message: "What ensured the safety of the financial system yesterday may not prove sufficient tomorrow."

*Authors: Signe Krogstrup, Thomas Sangill, and Mette von Sicard; F&D; MARCH 2024.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2024/03/krogstrup.pdf_