1. The Two Conflicting Views

A. Bank's Stability Assumption - For Accounting & Liquidity Reporting:

Banks split deposits into:

• Contractual Maturity: Legally repayable on demand. Model says = 1 day liability.[Savings][Current]
• Behavioural / Core Maturity: Statistically, 80% of retail savings stay >5 years. So ALM models them as stable, long-term funding.

This is codified in regulations:

• LCR - Basel III: Retail stable deposits assumed 3% run-off in 30 days, Less stable 10% run-off, Corporate operational 25%, Non-operational wholesale 100%
• NSFR: Stable deposits get 95% Available Stable Funding factor, less stable 90%
• Interest Rate Risk in Banking Book (IRRBB): Core deposits assigned 5-year behavioural life for NII modeling. Fair value of non-maturity deposit liability = carrying value - because bank assumes it will not leave.

B. Customer Behaviour Reality:

Customers don't follow model. Behaviour is driven by:

1. Belief, not math: Calomiris and Mason (2003) highlighted that a bank run is largely caused by depositors’ beliefs about their bank’s financial stability rather than actions taken by other depositors.
2. Digital acceleration: Internet and mobile banking + social media. Conventional assumptions about stability of some types of bank deposits – particularly retail – have increasingly been challenged as a result of growing number of information channels available to convey concerns about individual banks’ soundness and of internet and mobile banking.
3. Uninsured concentration: SVB had 97% corporate, uninsured deposits.

Result: Model says 3% outflow, reality is 85% in 2 days.

2. Real-World Case Studies - Where Assumption Failed

Case 1: Northern Rock - 2007 - First UK Bank Run in 150 Years

• Assumption: Short-term wholesale deposits + retail savings are sticky. Funded long-term mortgages with short-term deposits.
• Behaviour: News that Bank of England gave emergency funding leaked on BBC 13 Sept 2007. Retail customers queued outside branches. Lost 20% of deposit base in 4 days. Despite being solvent, had to be nationalized.
• Legal Outcome: Northern Rock - No legal case on deposits, but led to UK Banking Act 2009 and increase of deposit insurance from £35k to £85k. Established that depositor trust is cornerstone.

Case 2: Silicon Valley Bank - March 2023

• Assumption: SVB's corporate tech deposits were operational, stable. Used short-term deposits to buy longer maturity US mortgage bonds $27bn to $127bn from Q1 2020 to Q1 2022. Classified as core demand deposits - fair value same as balance sheet carrying value.
• Behaviour: 85% of deposits were uninsured corporate. VCs on Twitter told portfolio companies to withdraw. Lost 85% of deposits in 2 days, $42bn in one day. Signature Bank of New York lost 20% in one day.
• Regulatory Lesson: Toronto Centre for Financial Inclusion: Assumptions about stability of any category of bank deposits therefore need to be extremely conservative. SVB proved LCR 10% run-off assumption is obsolete when mobile apps allow instant transfer.

Case 3: Credit Suisse - 2023

• Assumption: Wealth Management deposits are sticky due to deep and longstanding relationships between depositors and banks.
• Behaviour: Research shows long-tenure depositors and depositors with loans in same bank are less likely to run, but members of same social network tend to run together. Credit Suisse lost CHF 111bn in Q4 2022 alone due to WhatsApp contagion in UHNW network.

3. Legal Case Law on Banker-Customer Deposit Relationship

This defines who owns the risk.

1. Foley v Hill - 1848 HL - Foundation
Relationship is perfectly clear - that of debtor and creditor; banker borrows money from customer under terms to repay it. Money deposited is NOT held in trust. Bank can use it. Customer is unsecured creditor.

2. Joachimson v Swiss Bank Corporation - 1921 3 KB 110 - The Leading Case

• Plaintiff partner tried to wind up partnership and sought repayment.
• Court held: Bank undertakes to receive money and collect bills for customer's account and that money so received is not held in trust for customer but borrowed from him with promise to repay. Relationship is debtor-creditor, but special feature: demand is necessary.
• In case of debt due from a bank, an express demand for repayment by customer is necessary before debt becomes actually and accruing due.
• Used in India: Santosh Kumar vs The King AIR 1952 Cal 193 - relationship between depositor & bank is simple relationship of creditor & debtor. No entrustment.
• Jammu & Kashmir Bank vs Nirmala Devi: Established that demand for repayment is condition precedent to suing banker for money deposited.

Why this matters for stability: Because legally, bank does NOT have to keep your money liquid. It has borrowed it. It can lend long-term. Customer's right is only to demand. When all demand at once = cannot pay.

3. Indian Case: Corporation Bank vs Navin J. Shah - 2000 SC
Bank's Right of Set-off - Corporate client maintains 3 distinct accounts, company intends to liquidate FD to pay supplier, but has defaulted on machinery loan. Can bank combine? SC held banker has general lien and right of set-off, but must give notice. Customer behaviour assumption that FD is separate fails - bank will adjust.

4. US Case: In re SVB Financial Group - 2023
Uninsured depositors argued they had trust property. Court held under Joachimson principle, deposits are loans to bank, not trust. Only FDIC insurance creates property right.

4. Regulatory Conflict - How RBI / Basel Tries to Bridge Gap

Basel IRRBB Guidelines 2016 now require banks to stress behavioural assumptions:

• Core deposit proportion capped at 90% of total
• Average behavioural maturity capped at 5 years
• Even if history shows 10 years, you cannot assume >5 years

RBI Circular on Liquidity Risk Management 2012:
Banks must do behavioral analysis for non-maturity deposits and assume:

• Savings: 90% core, 10% volatile
• Current: 85% core, 15% volatile
  But must stress test 25% outflow of core.