A Q-Theory of Banks

92 Pages Posted: 14 Oct 2020 Last revised: 18 Oct 2021

See all articles by Juliane Begenau

Juliane Begenau

Stanford University - Graduate School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Saki Bigio

University of California, Los Angeles (UCLA) - Department of Economics

Jeremy Majerovitz

Massachusetts Institute of Technology (MIT) - Department of Economics

Matias Vieyra

Government of Canada - Bank of Canada

Date Written: October 2020

Abstract

We propose a dynamic bank theory with a delayed loss recognition mechanism and a regulatory capital constraint at its core. The estimated model matches four facts about banks' Tobin's Q that summarize bank leverage dynamics. (1) Book and market equity values diverge, especially during crises; (2) Tobin's Q predicts future bank profitability; (3) neither book nor market leverage constraints are binding for most banks; (4) bank leverage and Tobin's Q are mean reverting but highly persistent. We examine a counterfactual experiment where different accounting rules produce a novel policy tradeoff.

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Suggested Citation

Begenau, Juliane and Bigio, Saki and Majerovitz, Jeremy and Vieyra, Matias, A Q-Theory of Banks (October 2020). NBER Working Paper No. w27935, Available at SSRN: https://ssrn.com/abstract=3709625

Juliane Begenau (Contact Author)

Stanford University - Graduate School of Business ( email )

Stanford, CA 94305
United States
6507245661 (Phone)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Saki Bigio

University of California, Los Angeles (UCLA) - Department of Economics ( email )

8283 Bunche Hall
Los Angeles, CA 90095-1477
United States

Jeremy Majerovitz

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

50 Memorial Drive
E52-391
Cambridge, MA 02142
United States

Matias Vieyra

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

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