Dynamic Banking and the Value of Deposits
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.
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Copy CitationPatrick Bolton, Ye Li, Neng Wang, and Jinqiang Yang, "Dynamic Banking and the Value of Deposits," NBER Working Paper 26802 (2020), https://doi.org/10.3386/w26802.Download Citation
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Published Versions
PATRICK BOLTON & YE LI & NENG WANG & JINQIANG YANG, 2025. "Dynamic Banking and the Value of Deposits," The Journal of Finance, vol 80(4), pages 2063-2105.
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