Dynamic Banking and the Value of Deposits
Fisher College of Business Working Paper No. 2020-03-013
Charles A. Dice Working Paper No. 2020-13
Journal of Finance, Forthcoming
65 Pages Posted: 10 Jun 2020 Last revised: 14 Nov 2023
There are 2 versions of this paper
Dynamic Banking and the Value of Deposits
Dynamic Banking and the Value of Deposits
Date Written: April 7, 2023
Abstract
We propose a theory of banking in which banks cannot perfectly control deposit flows. Facing uninsurable loan and deposit shocks, banks dynamically manage lending, wholesale funding, deposits, and equity. Deposits create value by lowering funding costs. However, when the bank is undercapitalized and at risk of breaching leverage requirements, the marginal value of deposits can turn negative as deposit inflows, by raising leverage, increase the likelihood of costly equity issuance. Banks' inability to fully control leverage distinguishes them from non-depository intermediaries. Our model suggests 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