[1mm Financial Talk] Banks Without Branches Have Higher Probability of Bank Runs

Forecast 'Bank Branch Density and Bank Run Vulnerability' Report
Early This Year, US Bank Run Bankrupt Banks Ranked Lowest in 'Branch Density'
Lower Branch Density Leads to Deposit Increase...Same Phenomenon in Korea

A customer is receiving consultation at a bank loan counseling desk. Photo by Jinhyung Kang aymsdream@

A study has found that 'banks without branches are more likely to experience bank runs (massive withdrawals) during crises.' Banks with low branch density usually attract deposits from corporate and individual customers who are accustomed to internet banking. Conversely, in times of crisis, depositors are at higher risk of quickly withdrawing large sums online.

According to the Deposit Insurance Corporation's report titled "Bank Branch Density and Bank Run Vulnerability" released on the 13th, the banks that failed during the U.S. bank runs last March had some of the lowest branch densities among banks. Silicon Valley Bank, with assets of $175 billion, had only 17 branches. Signature Bank ($104 billion) had just 38 branches. First Republic Bank ($166 billion) had 87 branches. Branch density refers to the number of branches per $1 billion in deposits. By this measure, their densities were 0.1, 0.36, and 0.53 respectively. The bottom decile of U.S. banks had a branch density of 0.7, so these figures were even lower.

The report stated, "Between 2010 and 2022, deposits at banks with branch densities in the bottom 10% increased by 129%, far exceeding the 32% deposit growth rate of banks with above-average branch densities." The total number of U.S. bank branches last year (79,186) decreased by 20% compared to 2009 (99,550). Meanwhile, total deposits increased by 76% during the same period ($7.55 trillion → $13.29 trillion).

These two trends are similarly observed in South Korea. According to the Financial Supervisory Service, the total number of domestic bank branches at the end of last year was 5,800, a 25% decrease from 7,699 in 2012. A financial industry official said, "As internet-only banks like KakaoBank, K Bank, and Toss Bank, which have no branches at all, expand their presence, reliance on online banking is increasing over time."

As the average loan interest rate in the banking sector has been rising for two consecutive months, a banner displaying mortgage loan interest rates is hung on the exterior wall of a commercial bank in Seoul on the 31st. Photo by Kang Jin-hyung aymsdream@

Household deposits have also surged recently. According to Hana Financial Management Research Institute, household deposit currency in South Korea increased by an average of 169 trillion won annually between 2020 and 2022. In the first quarter of this year, deposits rose by 62 trillion won compared to the previous quarter, a figure similar to the 63 trillion won increase during the same period last year, continuing to grow in size.

Kim Dong-hwan, a digital finance team researcher at the Deposit Insurance Corporation, said, "In addition to Silicon Valley, Signature, and First Republic Banks, other banks with low branch density also showed vulnerability to bank runs." This was evident when comparing U.S. banks before and after the bank runs earlier this year. Banks with about six fewer branches per $1 billion in deposits than others experienced 28% more online banking traffic and a 4% additional decline in price-to-earnings ratios.

Kim added, "Looking at the changes in deposit sizes in the U.S. during the first quarter, more deposits were withdrawn from banks with low branch density, especially affecting the outflow of uninsured deposits," and said, "We can consider the reliance on online banking of general banks and mutual savings banks in South Korea as an indicator of vulnerability to bank runs during crises."