Discussion paper

DP16670 A q-theory of banks

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.

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Citation

Begenau, J, S Bigio, M Vieyra and J Majerovitz (eds) (2021), “DP16670 A q-theory of banks”, CEPR Press Discussion Paper No. 16670. https://new.cepr.org/publications/dp16670