Working Paper: NBER ID: w28298
Authors: Patrick Bolton; Ye Li; Neng Wang; Jinqiang Yang
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.
Keywords: dynamic banking; value of deposits; leverage regulation; equity issuance
JEL Codes: E44; G21; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| deposit inflows (F21) | bank risk management strategies (G21) |
| high equity capital-to-deposit ratio (k) (G21) | increased lending capacity (G21) |
| low equity capital-to-deposit ratio (k) (G21) | reduced lending capacity (G21) |
| regulatory changes (G18) | bank lending and deposit-taking (G21) |
| relaxing the supplementary leverage ratio (SLR) (G28) | stimulate lending and deposit-taking (G21) |