We study the determinants of value creation in U.S. commercial banks. We develop novel measures of individual banks’ productivities at collecting deposits and making loans that we relate to bank market values. We find that deposit productivity is responsible for two-thirds of the value of the median bank and most variation in value across banks. Variation in productivity is driven by differences across banks in technology, customer demographics, and market power. We also find evidence of synergies between deposit-taking and lending. Our findings suggest that there is significant heterogeneity in banks’ ability to capture value by manufacturing safe assets.

We present a portfolio choice demand model that allows for the nonparametric estimation of investors’ (subjective) expectations and risk preferences. Using comprehensive 401(k)-plan-level data from 2009 through 2019, we explore heterogeneity in asset allocations using our empirical framework. We recover investors’ beliefs about each asset and examine the implications and potential sources of those beliefs. Heterogeneity in expectations across investors accounts for twice as much variation in portfolio holdings as heterogeneity in risk aversion. Belief heterogeneity is partly driven by investors’ characteristics and experiences, reflecting local sources of information such as county-level GDP and employers’ past performance.

We develop a structural empirical model of the US banking sector. Insured depositors and run-prone uninsured depositors choose between differentiated banks. Banks compete for deposits and endogenously default. The estimated demand for uninsured deposits declines with banks' financial distress, which is not the case for insured deposits. We calibrate the supply side of the model. The calibrated model possesses multiple equilibria with bank-run features, suggesting that banks can be very fragile. We use our model to analyze proposed bank regulations. For example, our results suggest that a capital requirement below 18 percent can lead to significant instability in the banking system.