Dynamic Banking and the Value of Deposits

Patrick Bolton, Ye Li, Neng Wang and Jinqiang Yang

No 26802, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We propose a theory of banking in which banks cannot perfectly control deposit flows. Facing uninsurable loan and deposit shocks, banks dynamically manage lending, wholesale funding, deposits, and equity. Deposits create value by lowering funding costs. However, when the bank is undercapitalized and at risk of breaching leverage requirements, the marginal value of deposits can turn negative as deposit inflows, by raising leverage, increase the likelihood of costly equity issuance. Banks’ inability to fully control leverage distinguishes them from non-depository intermediaries. Our model suggests a re-evaluation of leverage regulations and offers new perspectives on banking in a low interest-rate environment.

JEL-codes: G11 G31 G32 G35 (search for similar items in EconPapers)
Date: 2020-02
New Economics Papers: this item is included in nep-cfn and nep-rmg
Note: AP CF
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Citations: View citations in EconPapers (9)

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Working Paper: Dynamic Banking and the Value of Deposits (2020)
Working Paper: Dynamic Banking and the Value of Deposits (2020)
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