ECB research shows digital ties drive deposit rate spillovers
A new European Central Bank working paper finds that digital social ties transmit deposit rate shocks across banking markets. Small banks increase rates in response to changes in socially linked but geographically distant counties, driven by depositor search.
Digital ties reshape local deposit markets
Deposit markets are traditionally seen as local and segmented, but this study challenges that view by demonstrating how digital social networks integrate them across space.
The research formalizes a mechanism where social ties make financial opportunities salient to otherwise inattentive households.
When depositors become aware of rate changes in socially connected areas, it triggers a search for better offers.
This increased search activity raises deposit-market elasticity, compelling small banks to adjust their prices even in markets without direct geographic links to the original shock.
The authors use merger-driven variations in deposit rates and measures of digital social connectedness in US counties to empirically test these predictions.
They find that small banks indeed raise rates in socially linked markets, with these spillovers being economically meaningful and persistent.
Sophistication amplifies social spillovers
The research develops a stylized model of deposit rate competition across socially connected counties, incorporating behavioral frictions such as depositor inattention and heterogeneous search costs.
This model predicts that social connectedness, financial sophistication, and market competitiveness jointly amplify deposit rate responses.
The empirical strategy leverages quasi-experimental variation from merger-driven large bank exits in US counties, ensuring exogenous shocks.
Robustness checks confirm that social networks facilitate the exchange of deposit-related information, ruling out alternative mechanisms.
Social spillovers are more pronounced in counties with higher financial sophistication, indicating informed consumers amplify the transmission of deposit rate changes through networks.
Beyond local: Digital ties integrate markets
This paper compellingly shows digital social networks fundamentally alter local deposit markets.
The findings suggest broader implications for how financial information propagates and influences consumer behavior.
For policymakers, this highlights the growing importance of digital literacy and network effects in understanding financial stability and competition.