Work

Dynamic Banking and the Value of Deposits

Year: 2025

Type: article

Abstract: 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 nondepository intermediaries. Our model suggests a reevaluation of leverage regulations and offers new perspectives on banking in a low‐interest‐rate environment.

Source: The Journal of Finance

DOI: 10.1111/jofi.13454

Authors: PATRICK BOLTON, YE LI, NENG WANG, JINQIANG YANG

Institutions: University of Washington, Center for Economic and Policy Research, Centre for Economic Policy Research, Imperial College London

Language: English

Topic: Banking stability, regulation, efficiency

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: bronze

Funders: Ohio State University, National Natural Science Foundation of China

Awards: G2980602187, 理性疏忽下的动态公司金融理论研究, G6153156109