The recent spate of bank failures is upending a long-held theory among banking executives and regulators—that the value of a lender’s deposit business goes up when interest rates move higher.

The theory rests on an assumption: That banks don’t have to pay depositors much to keep their money around, even as rates rise. The deposits would be a stable source of low-cost funding while the bank earned more money lending at higher rates.

The more rates rose, the bigger the franchise value of those deposits would become—a natural hedge against the declining market values of a portfolio of fixed-rate loans and bonds.

But if rising rates or plunging asset values cause a bank’s depositors to flee en masse, the franchise value is zero—and, worse, it could beget other bank runs. That is what happened with Silicon Valley Bank.

Bank Runs Trash Long-Held Assumption on Deposits  at george magazine

“The current environment of declining deposits and runs on banks raises questions about whether most deposit amounts are sustainable, especially uninsured deposits, reducing deposit-franchise value,” said

Tom Linsmeier,
an accounting professor at the University of Wisconsin and a former Financial Accounting Standards Board member.

The franchise value of deposits doesn’t appear on banks’ financial statements. Banks use complex models to estimate the value, and they include it in an alternative measure of net worth called “economic value of equity” that lenders and regulators cite frequently. That number is often higher than a bank’s total equity, or assets minus liabilities, due to the franchise value of deposits. 

The Federal Reserve, which both regulates banks and sets interest-rate policy, in a November report pointed to large unrealized losses on banks’ bondholdings due to rising rates. Things weren’t so bad, the Fed said, because “the value of banks’ deposit franchise increases and provides a buffer against these unrealized losses.”

At Silicon Valley Bank, the decline in its assets’ market value was so severe that it spurred a run on the bank, accelerating deposit flight at other regional banks, including Signature Bank and First Republic Bank, which both failed. Since then, the Fed has said “SVB’s failure demonstrates that there are weaknesses in regulation and supervision that must be addressed.”

Silicon Valley Bank in its 2021 annual report said its economic value of equity was $20.7 billion, which was $4.1 billion higher than total equity. The lender also predicted, correctly, that its EVE would drop sharply if rates jumped. By the time it failed, Silicon Valley Bank had stopped reporting EVE altogether.

Banks have tried to promote EVE to get investors to focus less on their losses.
Zions Bancorp,
a Salt Lake City-based lender, reported $5.2 billion of total equity as of March 31. Investors might question that number because a footnote in the bank’s financial statements showed $2.2 billion of unrealized losses on its assets that didn’t count on its balance sheet.

Zions countered that it should get credit for an additional $5.1 billion of equity because of the estimated value of its deposit franchise, according to a presentation last month. Including the markup related to its deposits, Zions said its EVE was $8.1 billion as of March 31, almost $3 billion more than total equity under normal accounting rules. 

Bank Runs Trash Long-Held Assumption on Deposits  at george magazine

Zions Bancorp said it should get credit for $5.1 billion more of equity due to the estimated value of its deposit franchise.

Photo: Bloomberg News

Banks are telling investors to focus on the whole bank, not just the bad parts. One cited a famous painter to explain its view. Zions said in its presentation that focusing only on negatives results in a “Picasso-like portrait view of equity.” Investors aren’t convinced. Zions’ stock-market value today is $4 billion.

Zions spokesman

James Abbott
said the bank was highlighting the value of its low-cost, high-quality deposits. “The purpose of the entire disclosure was to try to help educate investors about how we think about interest-rate risk,” he said.

EVE offers banks another advantage—there is no standard way to calculate the metric. In general, EVE is calculated by estimating the present value of future cash flows from all of a bank’s assets and liabilities, as well as off-balance sheet items such as deposit-franchise value. 

PNC Financial Services
in a presentation last month said “improvement in the market value of PNC’s deposit base significantly outpaced unrealized losses on assets,” without providing a number for EVE. On a call with analysts, PNC’s chief executive,

William Demchak,
said investors should “have a more holistic look” at interest-rate risk, rather than focusing on declining market values for fixed-rate assets alone.


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Western Alliance Bancorp
reported an EVE of $8 billion as of March 31, much higher than its $5.5 billion of total equity. Its stock-market value, meanwhile, is $3.8 billion. The difference between total equity and EVE mainly was due to deposit-franchise value, Western Alliance’s chief financial officer,

Dale Gibbons,

Estimating the average life of demand deposits can be challenging since “you’re basically trying to anticipate human behavior,” he said. “There are a lot of assumptions in there that are hard, and they change all the time.”

During the first nine months of 2022, Western Alliance said its EVE rose to $11.1 billion from $8.9 billion, before dropping to $7.5 billion during the fourth quarter, when deposits fell.

Write to Jonathan Weil at [email protected] and Peter Rudegeair at [email protected]