Working paper series dynamic banking and the value of deposits

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. Patrick Bolton Columbia Business School 804 Uris Hall New York, NY 10027 and NBER pb2208@columbia.edu Ye Li The Ohio State University Fisher College of Business 2100 Neil Ave Fisher Hall 846 Columbus, OH 43210 li.8935@osu.edu Neng Wang Columbia Business School 3022 Broadway, Uris Hall 812 New York, NY 10027 and NBER nw2128@columbia.edu Jinqiang Yang Shanghai University of Finance and Economics Guoding Rd. 777 Shanghai, 200433 China yang.jinqiang@mail.sufe.edu.cn