present a model that explains the slow recovery of bank capital and economic activity. Banks provide intermediation in markets … selection. Adverse selection lowers bank profit margins which slows both the internal growth of equity and equity injections …

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 …