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

65 Pages Posted: 10 Jun 2020 Last revised: 14 Nov 2023

See all articles by Patrick Bolton

Patrick Bolton

Imperial College London; 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: 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

Bolton, Patrick and Li, Ye and Wang, Neng and Yang, Jinqiang, Dynamic Banking and the Value of Deposits (April 7, 2023). 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

Imperial College London ( email )

South Kensington Campus
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London, Greater London SW7 2AZ
United Kingdom

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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Ye Li (Contact Author)

University of Washington - Foster School of Business ( email )

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United States

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

Neng Wang

Columbia University - Columbia Business School, Finance ( email )

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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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