![]() ![]() If depositors flee, the deposit franchise evaporates, and the unrealized losses on securities must be realized as banks sell them to meet withdrawal demands. But this asset exists only if deposits remain with banks as rates rise, and we now know from Silicon Valley Bank and other US regional banks that such stickiness is far from assured. Indeed, some estimates suggest that rising rates have increased US banks’ total deposit-franchise value by about $1.75 trillion. Since banks still pay near 0% on most of their deposits, even though overnight rates have risen to 4% or more, this asset’s value rises when interest rates are higher. To be sure, rising inflation reduces the true value of bank liabilities (deposits) by upping their ‘deposit franchise’, an asset that is not on their balance sheet.
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