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Dynamic Banking and the Value of Deposits

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Listed:
  • Patrick Bolton
  • Ye Li
  • Neng Wang
  • Jinqiang Yang
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.

Suggested Citation

  • Patrick Bolton & Ye Li & Neng Wang & Jinqiang Yang, 2020. "Dynamic Banking and the Value of Deposits," NBER Working Papers 26802, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:26802
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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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