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

61 Pages Posted: 10 Jun 2020 Last revised: 23 Sep 2021

See all articles by Patrick Bolton

Patrick Bolton

Columbia University - Columbia Business School, Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Ye Li

University of Washington - Foster School of Business

Neng Wang

Columbia University - Columbia Business School, Finance; National Bureau of Economic Research (NBER); Asian Bureau of Finance and Economic Research (ABFER)

Jinqiang Yang

Columbia University; Shanghai University of Finance and Economics

Multiple version iconThere are 2 versions of this paper

Date Written: September 20, 2021

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: 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

Bolton, Patrick and Li, Ye and Wang, Neng and Yang, Jinqiang, Dynamic Banking and the Value of Deposits (September 20, 2021). Fisher College of Business Working Paper No. 2020-03-013, Charles A. Dice Working Paper No. 2020-13, Available at SSRN: https://ssrn.com/abstract=3624119 or http://dx.doi.org/10.2139/ssrn.3624119

Patrick Bolton

Columbia University - Columbia Business School, Economics ( email )

420 West 118th Street
New York, NY 10027
United States

HOME PAGE: http://www0.gsb.columbia.edu/faculty/pbolton/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

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European Corporate Governance Institute (ECGI)

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Belgium

HOME PAGE: http://www.ecgi.org

Ye Li (Contact Author)

University of Washington - Foster School of Business ( email )

Box 353200
Seattle, WA 98195
United States

HOME PAGE: http://https://yeli-macrofinance.com/

Neng Wang

Columbia University - Columbia Business School, Finance ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER) ( email )

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Asian Bureau of Finance and Economic Research (ABFER) ( email )

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Jinqiang Yang

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

Shanghai University of Finance and Economics ( email )

Law School, 777 Guoding Road, Yangpu District
Shanghai, AK 200433
China

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