Dynamic Banking and the Value of Deposits
Charles A. Dice Working Paper No. 2020-13
61 Pages Posted: 10 Jun 2020 Last revised: 23 Sep 2021
Date Written: September 20, 2021
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: Deposits, Dynamic Banking, Q-Theory, Risk Management, Financial Constraint, Supplementary Leverage Ratio, Low Interest Rate, Inside Money, Payment
JEL Classification: E4, E5, G21, G3
Suggested Citation: Suggested Citation