We propose a dynamic theory of banking where the role of deposits is akin to that of productive capital in the classical Q-theory of investment for non-financial firms. As a key source of leverage, deposits create value for well-capitalized banks. However, unlike productive capital of...

Using a structural model, we estimate the liquidity multiplier of an interbank network and banks' contributions to systemic risk. To provide payment services, banks hold reserves. Their equilibrium holdings can be strategic complements or substitutes. The former arises when payment velocity is...

The ratio of long- to short-term dividend prices, “price ratio” (pr), predicts annual market return with an out-of-sample R2 of 19%, subsuming the predictive power of price-dividend ratio (pd). After controlling for pr, pd predicts dividend growth with an out-of-sample R2 of 30%. Our results...

We propose a dynamic theory of banking where the role of deposits is akin to that of productive capital in the classical q-theory of investment. As a cheap source of leverage, deposits typically create value for banks, but the marginal q of deposits can be negative. Deposit accounts commit banks...