Dynamic Deposits : The Role of Inflows on Future Outflows

Deposit inflows into the banking system are typically considered beneficial, given the business model of banks and their reliance on deposits. However, we show that deposit inflows can also lead to negative consequences. Banks that exhibit uninsured deposit inflows become riskier by increasing both interest rate risk and credit risk. In periods of monetary tightening, these banks face greater losses, and the more constrained ones experience uninsured deposit outflows. High uninsured deposit inflows can serve as an early indicator for changes in bank risk and future deposit outflows---and even runs to the bank---assisting depositors, bankers, stakeholders, and policymakers. This mechanism also plays a key role in understanding the 2022-2023 U.S. bank fragility episode. The risky exposures of banks were amplified following deposit inflows in 2020-2021. When the fed funds rate rose in 2022-2023, this led to losses on their securities and loan portfolios, and deposit outflows from constrained banks