We find that a broader access to and use of bank deposits can significantly mitigate bank deposit withdrawals or growth slowdowns in times of financial stress (Figure 1). While this finding holds for the entire sample of HICs, MICs, and LICs, it could be particularly strong in MICs, where a large share of population still lacks access to bank deposits, trust in banks is yet to be firmly established, and the integration in global financial flows is growing. In addition to the access and use of deposits, bank stability—measured by the aggregate z-score, and the dummy for the occurrence of banking crises are the most significant explanatory variables in our regressions. The results hold even when accounting for the possible leverage effects of outliers.

The main message is that countries should recognize that policies to promote a broader use of bank deposits could improve resilience of bank funding. Such policies can thus enhance overall financial stability and complement the mainstream macroprudential policies to foster stability of the financial system.

Our paper responds to an existing gap in the empirical literature linking greater access to deposits with greater financial (banking sector) stability. While the literature postulates that an inclusive financial sector will have a more diversified, stable retail deposit base that can increase systemic stability, empirical research confirming existence of such a relationship, especially at the level of the financial system, is largely absent in the literature (GPFI, 2012; Cull et al., 2012; Prasad, 2010).

At the individual and household level, savings support stability and, given their very large numbers, small savers potentially contribute to stability at the financial system level (Cull et al., 2012). Low income savers tend to maintain steady financial behavior through the business cycle. Hence, during crises, deposits from low income clients typically act as a continued source of funds even when other sources of bank financing dry up or become difficult to roll over. Small customers thus provide big opportunities to mobilize stable deposits (Khan, 2011). Greater financial inclusion, including access to savings, can also enhance financial stability indirectly, by providing individuals, households, and small firms with greater access to financial risk-managing tools. This greater access can enhance resilience and stability of the real economy and thus also the financial system that serves it (GPFI, 2012; Cull et al., 2012; Khan, 2011).

At the bank level, focusing on retail deposit generation can produce a more diversified and stable funding base that is less sensitive to changes in market interest rates and a bank’s financial condition. In stress times, insured depositors have proven to be a bank’s most reliable funding source and, therefore, play an integral role in mitigating liquidity risk (OCC, 2012). The global crisis demonstrated that stable retail sources of funding, in contrast with reliance on borrowed funds, can greatly enhance the soundness and resilience of financial institutions and reduce volatility of earnings (Khan, 2011). Diversified funding base of financial institutions has played a role in cushioning the impact of a global credit (wholesale funding) crunch on domestic financial intermediation (Hannig and Jansen, 2010).

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