DP16670 A q-theory of banks

Author(s): Juliane Begenau, Saki Bigio, Jeremy Majerovitz, Matias Vieyra
Publication Date: October 2021
Keyword(s): banks, Delayed Accounting, Leverage Dynamics, Market vs. Book Values
JEL(s): E44, G21, G32, G33
Programme Areas: Financial Economics, International Macroeconomics and Finance, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16670

We propose a dynamic bank theory with a delayed loss recognition mechanism and a regulatory capital constraint at its core. The estimated model matches four facts about banks' Tobin's Q that summarize bank leverage dynamics. (1) Book and market equity values diverge, especially during crises; (2) Tobin's Q predicts future bank profitability; (3) neither book nor market leverage constraints are binding for most banks; (4) bank leverage and Tobin's Q are mean reverting but highly persistent. We examine a counterfactual experiment where different accounting rules produce a novel policy tradeoff.