As revealed by the failures of three regional banks in the spring of 2023, bank runs are not a thing of the past. To inform the ongoing discussion of the appropriate regulatory response, Harvard researchers, which included former Fed officials, examine trends in the banking industry over the last 25 years.
On the liability side of bank balance sheets, deposits — and especially uninsured deposits — have grown rapidly. On the asset side, there has been a notable shift away from the information-intensive lending traditionally associated with banks and towards longer-term securities such as MBS and long-term Treasuries. These trends appear to be related, in the sense that banks with the most rapid growth in deposits have seen the biggest declines in loans as a share of assets.
Thus, while the banks that failed in early 2023 were arguably extreme cases, they reflect broader trends, especially among larger banks.
Researchers construct a simple model to help assess the main regulatory options to reduce the risk of destabilizing bank runs — expanding deposit insurance and strengthening liquidity regulation — and argue that the industry trends they document favor the latter option.
Using the model, researchers offer some design considerations for modifying the Liquidity Coverage Ratio so as to require banks to pre-position sufficient collateral — largely in the form of short-term government securities — at the Federal Reserve’s discount window to ensure they have enough liquidity to withstand a run on their uninsured deposits.