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A Q-Theory of Banks

Juliane Beganau, Saki Bigio, Jeremy Majerovitz and Matias Vieyra

Staff Working Papers from Bank of Canada

Abstract: We document five facts about banks: (1) market and book leverage diverged during the 2008 crisis, (2) Tobin's Q predicts future profitability, (3) neither book nor market leverage appears constrained, (4) banks maintain a market-leverage target that is reached slowly, and (5) pre-crisis, leverage was predominantly adjusted by liquidating assets. After the crisis, the adjustment shifted towards retaining earnings. We present a Q-theory where notions of leverage differ because book accounting is slow to acknowledge loan losses. We estimate the model and show that it reproduces the facts. We examine counterfactuals where different accounting rules produce novel policy tradeoffs.

Keywords: Coronavirus disease (COVID-19); Domestic demand and components; Payment clearing and settlement systems; Recent economic and financial developments (search for similar items in EconPapers)
JEL-codes: E44 G21 G33 (search for similar items in EconPapers)
Pages: 112 pages
Date: 2021-09
New Economics Papers: this item is included in nep-acc, nep-ban and nep-mac
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Related works:
Working Paper: A Q-Theory Of Banks (2020) Downloads
Working Paper: A Q-Theory of Banks (2020) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:21-44

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