Working Paper: CEPR ID: DP16670
Authors: Juliane Begenau; Saki Bigio; Matias Vieyra; Jeremy Majerovitz
Abstract: We propose a dynamic bank theory with a delayed loss recognition mechanism and a regulatory capital constraint at its core. The estimated model matches four facts about banks' Tobin's Q that summarize bank leverage dynamics. (1) Book and market equity values diverge, especially during crises; (2) Tobin's Q predicts future bank profitability; (3) neither book nor market leverage constraints are binding for most banks; (4) bank leverage and Tobin's Q are mean reverting but highly persistent. We examine a counterfactual experiment where different accounting rules produce a novel policy tradeoff.
Keywords: banks; leverage dynamics; market vs book values; delayed accounting
JEL Codes: G21; G32; G33; E44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tobin's q (G19) | future bank profitability (G21) |
| Tobin's q (G19) | loan charge-offs (G33) |
| return shocks (E32) | bank leverage dynamics (G21) |
| negative return shocks (E32) | market leverage (G19) |
| book equity (G12) | bank leverage (G21) |
| market equity (G10) | bank losses (F65) |
| book leverage constraints (F34) | leverage decisions (G11) |
| market leverage constraints (G19) | leverage decisions (G11) |
| divergence of book and market equity (G19) | bank behavior (G21) |