European Central Bank working paper finds digital social ties transmit US deposit rate shocks to small banks

The European Central Bank has published a working paper analysing whether online social networks transmit deposit-rate shocks across banking markets. Using US data, the authors find that when rate changes in one county become salient through digital social ties, small banks in socially connected but geographically distant counties raise their own deposit rates, suggesting that social networks can integrate deposit markets beyond local geography. The analysis combines branch-level advertised deposit rates (focusing on a 12-month certificate of deposit with a USD 10,000 minimum) with county-level measures of Facebook-based social connectedness and merger-related large-bank branch closures as quasi-exogenous shocks. Results indicate that small banks raise rates after merger-induced large-bank exits in their local market, with stronger effects where small-bank competition is higher, while large banks show little response consistent with uniform pricing. Spillover estimates are economically meaningful, for example a one standard deviation increase in deposit rates in socially connected counties is associated with a 23.3 basis points increase in the focal county’s small-bank rate for the 12-month USD 10,000 product, and the effect is more pronounced in counties with more financially sophisticated households; increased social connectivity is also linked to faster convergence in small-bank deposit rates across socially proximate markets.