Case studyObservationBankingCrises and market history
Deposit betas kept rising after March 2023, but the run did not change their path
Deposits and the March 2023 Banking Crisis–A Retrospective · 2024
The idea
The 2023 bank failures are a staple of banking interviews, and the usual story is that they changed how banks had to pay for deposits. The New York Fed's retrospective is more precise. Cumulative deposit betas continued to rise after March but did not accelerate. The distress was concentrated in super-regionals, whose outflows went mainly to the largest banks, and the largest banks' betas rose more slowly, consistent with depositors treating them as safer. The super-regionals' higher betas pre-dated the run, so the run exposed a difference rather than creating one.
The 2023 runs redistributed deposits towards the largest banks and exposed a pricing gap that already existed; they did not reprice the system.
When it works
Any question about the 2023 banking crisis, deposit flight or the funding advantage of the largest banks.
When it may fail
A retrospective one year on, over an industry whose assets had been roughly flat since rates rose. The pattern may not hold in a crisis that starts at a larger bank.
How to use it
When the crisis comes up, give the mechanism, a run on uninsured deposits at a few mid-sized banks, and then the data: where the money went and what it did to pricing. The second half is what most candidates lack.
Where it came from
Research Deposits and the March 2023 Banking Crisis–A Retrospective · Stephan Luck and Matthew Plosser, Federal Reserve Bank of New York (Liberty Street Economics)
What the source says. Cumulative deposit betas continued to rise after March 2023 but did not accelerate; distress concentrated in holding companies with $50 billion to $250 billion of assets, whose outflows went mainly to banks above $250 billion.
Connected ideas
Worth knowing first
Net interest margin is made on the deposit side, and deposit betas say howA bank's margin in a hiking cycle is decided by how slowly it reprices its deposits, measured as the deposit beta.
Puts it to work
A bank run is a maturity mismatch, not a solvency problemA bank fails when its liabilities come due faster than its assets, which can happen to a solvent bank.
Concepts
Put it to work on L3VLUP
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