Containing Technology-Driven Bank Runs

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The sudden withdrawal of bank deposits—accelerated by digital technology—contributed to the failures of Silicon Valley Bank, Signature Bank, and First Republic Bank in the United States and Credit Suisse in Switzerland in the spring of 2023.
The speed of withdrawals in 2023 was unprecedented compared with earlier episodes of bank runs when social media and mobile banking apps were unheard of or barely existed.
A bank run is defined as many customers simultaneously withdrawing deposits because they worry about a bank's financial health; uninsured deposits may be withdrawn when there are concerns about a bank’s health.
Even a fundamentally healthy bank can collapse if it lacks sufficient liquid funds to meet withdrawals that are large and rapid enough to be self-fulfilling.
Financial authorities and regulators maintain governance frameworks to contain the systemic and growth-impacting risks of bank runs.

Mobile and online banking have made it easier to transfer money between banks 24/7, reducing frictions that historically limited transfers.
Increasing access to cheap instant payment systems is reducing the time it takes for a customer to transfer money from one bank to another.
Personal banking relationships and associated loyalty may play less of a role as banking relationships become increasingly digital.
Artificial intelligence (AI) can analyze large volumes of data (including terms and conditions, social media, and traditional media) quickly and could enable tools that automatically and instantly reallocate deposits across banks according to customer-set criteria (for example, interest paid on deposits, perceived bank safety, or diversification).
Regulatory requirements such as know-your-customer may not prevent AI-powered tools from opening accounts on behalf of a customer once the customer uploads documents and mandates to the tool.
The authors note that while the future impact of AI and tech innovations is uncertain, it is possible to imagine that the frequency of bank runs may increase significantly.

A typical bank funds itself mainly with deposits, holding only a fraction to meet potential withdrawals while using the remainder to generate income (for example, loans to individuals or businesses).
The business model depends on depositors not withdrawing money all at once because deposits are tied up in longer-term lending.
If withdrawals occur slowly, the bank can seek funding alternatives or sell assets; fast withdrawals can prevent a bank from securing alternatives and bring it down.
The potential speed of withdrawals is crucial; advancing digital frontiers can increase that speed and therefore pose a potential threat to financial stability.

Technology can also be used to reduce run risk: AI tools may improve liquidity management and monitor withdrawal patterns.
Other mitigation tools include:
- More equity financing for banks.
- More liquid assets on banks’ balance sheets that can be used quickly to repay depositors.
- Extensions of deposit insurance and access to central bank funding facilities in crises.
- Appropriate recovery and resolution regimes to restore confidence and prevent contagion.
Each tool has undesirable side effects that must be balanced against their risk-reduction benefits:
- Requiring deposits be placed in highly liquid safe assets (for example, high-quality government bonds) would reduce run risk but could reduce lending to the real economy and affect central bank and government balance sheets and asset prices.
- Expanding deposit insurance could impose high costs on the public purse if not pre-funded, and could create moral hazard by weakening banks’ incentives to behave prudently.
- Extending central bank emergency lending access could place central banks at risk of financial loss and encourage risky behavior or disrupt the interbank loan market.
The authors emphasize there is no silver bullet; some risk will always remain and the balance of tools may need to shift as technology evolves.

A CBDC would allow households and firms to convert commercial bank deposits into deposits at a central bank (a CBDC account).
Deposits at the central bank would generally be considered very safe and a shift to CBDC could transform runs into runs from commercial banks to the central bank’s balance sheet.
If CBDC accounts are unconstrained, customers might shift all funds from perceived risky commercial banks to the central bank, potentially increasing or exacerbating bank-run risk.
Some central banks considering CBDCs are contemplating constraints on how much a household or firm can deposit in a CBDC account to limit this risk.
The authors note that if banking technology substantially increases withdrawal speed, the presence of even unlimited CBDCs may not affect the speed of bank runs.

Continue to develop and employ a mix of tools—capital, liquidity buffers, deposit insurance design, central bank facilities, recovery and resolution frameworks, and technology-based monitoring—to contain run risk.
Balance each tool’s benefits against its potential adverse side effects (for example, impacts on lending, central bank balance sheets, public finances, asset prices, moral hazard, and market functioning).
Follow technological developments closely and consider adjustments to the policy toolkit as technology uptake and capabilities evolve.
Recognize that safeguards effective yesterday may not be sufficient tomorrow; remain adaptable to unpredictable technological breakthroughs.

Containing Technology-Driven Bank Runs — Signe Krogstrup, Thomas Sangill, Mette von Sicard; F&D Magazine; March 2024

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