Do rising interest rates increase the value of Deposits?

Interesting and thought-provoking article in the Wall Street Journal today that made me question some long-held beliefs about banking.

We have always believed that banks benefit when interest rates go up because they can keep deposits without paying much to depositors. However, recent bank failures have proven this idea wrong. When interest rates rise or the value of a bank’s assets goes down, depositors can panic and withdraw their money all at once. This can wipe out the value of a bank’s deposit business and even trigger more bank runs.

It turns out that banks don’t always account for the value of deposits in their financial statements. They use complex models to estimate this value, which can be higher than the bank’s actual worth. The Federal Reserve, which oversees banks and interest rates, had previously seen the value of deposits as a buffer against losses. But the failure of Silicon Valley Bank showed that there are weaknesses in regulation and supervision that need to be addressed.

In hindsight this is not new: All students of Finance know that rising interest rates increase value of existing liabilities but also lower value of existing assets. We forgot this second part.

Citation: Weil, Jonathan and Rudegeair, Peter. “Bank Runs Trash Long-Held Assumption on Deposits.” The Wall Street Journal, 22 May 2023, https://www.wsj.com/articles/bank-runs-trash-long-held-assumption-on-deposits-11658924524