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
There are 2 versions of this paper
Dynamic Banking and the Value of Deposits
Dynamic Banking and the Value of Deposits
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: Suggested Citation