The Cross Section of Bank Value

Abstract

We study the determinants of value creation within U.S. commercial banks. We focus on three theoretically-motivated drivers of bank value: screening and monitoring, "safe" deposit production, and synergies between deposit-taking and lending. To assess the relative contributions of each, we develop novel measures of banks' deposit productivity and asset productivity and use these measures to evaluate the cross-section of bank value. We find that variation in deposit productivity explains the majority of variation in bank value, consistent with theories emphasizing safe-asset production. We also find evidence of meaningful value creation from synergies between deposit-taking and lending. Overall, our findings suggest that banks are primarily "special" due to their unique liability structure rather than their ability to screen and monitor borrowers.

Monetary Transmission through Shadow Banks

“…Following this line of research, I introduce product differentiation and depositor heterogeneity into the existing framework of Drechsler et al (2017) and find that monetary tightening may have expansionary effects on certain types of banks depending on their transaction convenience and depositor clientele. This paper also adds to a new and growing body of literature that applies a structural IO approach to financial intermediation topics such as bank runs (Egan, Hortaçsu, and Matvos 2017a), bank value creation (Egan, Lewellen, and Sunderam 2017b), insurance (Koijen and Yogo 2016), and mortgages (Buchak, Matvos, Piskorski, and Seru 2017). This paper is the first attempt to use a structural IO model to study transmission channels of monetary policy.…”

A Critical Assessment on Bank Valuation in Existing Literature in the Last Decade

“…The study showed that banks create value through excellent deposit gathering, outstanding production of loans and other assets, and forming synergies between loans and deposits; and among these three, the ability to produce deposits is the most significant in explaining crosssectional changes in bank value (Egan et al, 2016). Moreover, the study concluded that banks are unique entities that create value through provision of special services from their liabilities (Egan et al, 2016). Gounder & Venkateshwarlu (2017) (Gounder & Venkateshwarlu, 2017).…”

“…The study of Egan, Lewellen, & Sunderam (2016) looked into determinants of creating value among US commercial banks focusing on deposit productivity and asset productivity. Using data of eight hundred fortyseven [847] bank holding companies from 1994 to 2015 taken from the Federal Reserve FR Y-9C reports for balance sheets and income statements, stock market data from CRSP, advertised deposit rates from RateWatch, and branch-level deposit quantities from FDIC annual summary of deposits, productivity measures were calculated using demand estimates, and residuals and bank fixed effects to measure asset productivity (Egan et al, 2016).…”

“…The study of Egan, Lewellen, & Sunderam (2016) looked into determinants of creating value among US commercial banks focusing on deposit productivity and asset productivity. Using data of eight hundred fortyseven [847] bank holding companies from 1994 to 2015 taken from the Federal Reserve FR Y-9C reports for balance sheets and income statements, stock market data from CRSP, advertised deposit rates from RateWatch, and branch-level deposit quantities from FDIC annual summary of deposits, productivity measures were calculated using demand estimates, and residuals and bank fixed effects to measure asset productivity (Egan et al, 2016). The study showed that banks create value through excellent deposit gathering, outstanding production of loans and other assets, and forming synergies between loans and deposits; and among these three, the ability to produce deposits is the most significant in explaining crosssectional changes in bank value (Egan et al, 2016).…”

Spillovers of Funding Dry-Ups

“…The liability structure of banks and their competitiveness in sourcing deposits are increasingly recognized as key reasons for why banks are special (e.g. Drechsler, Savov and Schnabl, 2017;Egan, Lewellen and Sunderam, 2017). While the focus of the literature has been mostly on retail deposits, wholesale funding constitutes an increasingly important part of bank liabilities, especially for dollar banking activities of non-US banks.…”