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A Q-Theory of Banks

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  • Juliane Begenau
  • Saki Bigio
  • Jeremy Majerovitz
  • Matias Vieyra

Abstract

Bank capital requirements are based on book values, which are slow to reflect losses. In this article, we develop a dynamic model of banks to study the interaction of regulation and delayed accounting. Our model explains four stylized facts: book and market values diverge during crises, the market-to-book ratio predicts future profitability, book leverage constraints rarely bind strictly even as market leverage fans out during crises, and banks delever gradually after net-worth shocks. We show how delayed accounting can allow the regulator to achieve better outcomes than immediate (mark-to-market) accounting. In an estimated version of the model, the optimal regulation couples faster loan-loss recognition with a modest relaxation of the book leverage constraint.

Suggested Citation

  • Juliane Begenau & Saki Bigio & Jeremy Majerovitz & Matias Vieyra, 2026. "A Q-Theory of Banks," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 93(1), pages 106-143.
    • Handle: RePEc:oup:restud:v:93:y:2026:i:1:p:106-143.
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    File URL: http://hdl.handle.net/10.1093/restud/rdaf035
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