Dynamic Banking and the Value of Deposits

Patrick Bolton, Ye Li, Neng Wang and Jinqiang Yang

No 28298, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We propose a dynamic theory of banking where the role of deposits is akin to that of productive capital in the classical q-theory of investment. As a cheap source of leverage, deposits typically create value for banks, but the marginal q of deposits can be negative. Deposit accounts commit banks to accept any inflows and outflows, so that banks cannot perfectly control leverage. Such uncertainty destroys value when banks have insufficient equity capital to buffer shocks. Our model lends itself to a re-evaluation of leverage regulations and offers new perspectives on banking in a low interest-rate environment.

JEL-codes: E44 G21 G32 (search for similar items in EconPapers)
Date: 2020-12
New Economics Papers: this item is included in nep-ban and nep-mac
Note: AP CF EFG
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Citations: View citations in EconPapers (14)

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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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