A Q-Theory of Banks
We document five facts about banks: (1) market and book leverage diverged during the 2008 crisis, (2) Tobin's Q predicts future profitability, (3) neither book nor market leverage appears constrained, (4) banks maintain a market leverage target that is reached slowly, (5) pre-crisis, leverage was predominantly adjusted by liquidating assets. After the crisis, the adjustment shifted towards retaining earnings. We present a Q-theory where leverage notions differ because book accounting is slow to acknowledge loan losses. We estimate the model and show that it reproduces the facts. We examine counterfactuals: different accounting rules produce a novel policy tradeoff.
We would like to thank Youngmin Kim, Adam Su, and Mengbo Zhang for research assistance. We thank Andrew Atkeson, Haelim Anderson, Patrick Bolton, Dean Corbae, Pablo D'Erasmo, Andrea Eisfeldt, Francesco Ferrante, Mark Gertler, Kinda Hachem, Valentin Haddad, Benjamin Hebert, Arvind Krishnamurthy, Anton Korinek, Hanno Lustig, Ken Miyahara, Gaston Navarro, Andrea Prestipino, Jose-Victor Rios-Rull, Pari Sastry, Jesse Schreger, Jeremy Stein, Robert Townsend and Pierre-Olivier Weill for many useful comments. We are also grateful to Elena Loutskina, Thorsten Koeppl, David Martinez-Miera and Adrián Pardo for discussing our paper. We thank the MFM Winter 2019 Meeting, the Banco de Mexico, the Philly Fed, and the Columbia 2020 Junior Finance Conference. Previous versions of the paper circulated under the title “Data Lessons on Bank Behavior.” These are our views and not necessarily those of the Bank of Canada, the Federal Reserve Bank of San Francisco, or the National Bureau of Economic Research.