Bank capital and dividend externalities

Viral Acharya, Hanh Le and Hyun Song Shin

No 580, BIS Working Papers from Bank for International Settlements

Abstract: Dividend payouts affect the relative value of claims within a firm. When firms have contingent claims on each other, as in the banking sector, dividend payouts can shift the relative value of stakeholders' claims across firms. Through this channel, one bank's capital policy affects the equity value and risk of default of other banks. In a model where such externalities are strong, bank capital takes on the attribute of a public good, where the private equilibrium features excessive dividends and inefficient recapitalization relative to the efficient policy that maximizes banking sector equity. We compare the implications of the model with observed bank behavior during the crisis of 2007-09.

Keywords: bank dividends; capital erosion; systemic risk (search for similar items in EconPapers)
Pages: 56 pages
Date: 2016-09
New Economics Papers: this item is included in nep-ban and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Related works:
Journal Article: Bank Capital and Dividend Externalities (2017)
Working Paper: Bank Capital and Dividend Externalities (2014)
Working Paper: Bank Capital and Dividend Externalities (2013)
Working Paper: Bank Capital and Dividend Externalities (2013)
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