Dynamic Competition for Sleepy Deposits

Abstract: We examine how “sleepy deposits” affect competition, bank value, and financial stability. Using novel data on account openings and closures at over 900 banks, we show that only 5–15% of depositors open new accounts per year. More closures are driven by moving or death than rate-shopping. We develop an empirical model in which banks face dynamic invest-versus-harvest incentives. We find that depositor sleepiness accounts for 57% of average deposit franchise value, softening competition particularly for banks in low-concentration markets and banks with low-quality services. Sleepiness also enhances financial stability and significantly reduced default probabilities during the 2023 banking turmoil.