Hedging Deposit Run Risk Prior to the 2023 Regional Banking Crisis

TL;DR

This paper investigates whether banks actively managed deposit run risk before the 2023 regional banking crisis, finding limited evidence of proactive risk management through balance sheet adjustments.

Contribution

It provides an empirical analysis of factors influencing uninsured deposits and assesses the extent of pre-crisis risk management by banks.

Findings

Interest rate derivatives affected deposit changes

Interest rate options had no impact on deposits

Banks did not appear to manage run risk proactively

Abstract

In this analysis we determine factors driving the cross-sectional variation in uninsured deposits during the interest rate raising cycle of 2022 to 2023. The goal of our analysis is to determine whether banks proactively managed deposit run risk prior to the hiking cycle which produced the 2023 Regional Banking Crisis. We find evidence that interest rate forward, futures, and swap use affected the change in a bank uninsured deposits over the period. Interest rate option use, however, has no effect on the change in uninsured deposits. Similarly, bank equity levels were uncorrelated with uninsured deposit changes. We conclude we find no evidence of banks managing run risk via their balance sheet prior to the 2023 Regional Banking Crisis.