Scotti highlights research role in navigating financial transformation

Digital transformation has brought efficiency and inclusion to banking, yet the 2023 US bank turmoil highlighted its potential to amplify inherent vulnerabilities.

Digital banking enables instant fund movements and, combined with social media, can accelerate deposit outflows during stress, as seen with regional US banks and Credit Suisse.

This also increases deposit sensitivity to interest rates, making monetary tightening pass through more rapidly and unevenly to bank balance sheets and credit conditions.

Banca d'Italia research indicates that euro area digital banks shifted significantly towards higher-yielding term deposits during the recent tightening cycle.

The evolving interaction with financial stability is unpredictable, with AI-based tools potentially reducing panic through transparency or increasing run risk by facilitating depositor coordination.

The recent monetary tightening cycle highlighted how rising policy rates led to significant losses on banks' fixed-income securities portfolios.

These losses eroded regulatory capital and constrained lending capacity, even when solvency was not immediately at risk.

Unrealized losses, especially in institutions with low capital buffers and high uninsured deposits, can undermine confidence and trigger runs, as demonstrated by recent US banking stress.

Concurrently, the rapid expansion of non-bank financial intermediation (NBFI) has reshaped financial systems.

NBFIs engage in bank-like activities without comparable regulation or safety nets, raising financial stability concerns.

The 2022 UK gilt crisis showed how leverage in NBFIs can amplify market stress, and interconnections with banks, such as through synthetic securitization and private credit lines, are growing.