Moderation or indulgence? Effects of bank distribution restrictions during stress

Jonathan Acosta-Smith (), Jozef Baruník, Eddie Gerba () and Petros Katsoulis ()
Additional contact information
Jonathan Acosta-Smith: Organisation for Economic Co‑operation and Development (OECD)
Eddie Gerba: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
Petros Katsoulis: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH

No 1053, Bank of England working papers from Bank of England

Abstract: At the onset of the Covid‑19 crisis, several regulatory authorities issued a recommendation or request to banks to restrict their dividend and share buyback distributions. The purpose of this action was to increase banks’ resilience by not distributing retained earnings, and help them support the real economy given their unique role in doing so. These restrictions reflected the singular circumstances brought by Covid‑19. We evaluate the impact of these restrictions on banks’ resilience, lending and investors’ required rate of return. First, using a difference‑in‑differences analysis on an international sample of European banks, we find that restricted banks increased their available Common Equity Tier 1 (CET1) capital and resilience in every quarter while the restrictions were fully in place, before gradually reducing it once they were partly lifted. Second, using a data set on the universe of UK small and medium‑sized enterprise (SME) loans issued by nine UK banking groups, we find that restricted banks increased their lending volumes on smaller non‑government guaranteed loans throughout the implementation period. Third, using the international sample of European banks, we find that the restrictions increased shareholders’ required rate of return throughout the implementation period, with the impact on the required rate of return on capital partially offset by lower debtholders’ required rate of return. The results indicate that distribution restrictions can be an effective crisis tool to increase banks’ resilience and lending capacity.

Keywords: Distribution restrictions; Covid-19; required rate of return; lending; pass-through (search for similar items in EconPapers)
JEL-codes: C32 G21 G28 G35 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2024-11-24
New Economics Papers: this item is included in nep-ban and nep-eur
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.bankofengland.co.uk/-/media/boe/files/ ... ns-during-stress.pdf Full text (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:1053

Access Statistics for this paper

More papers in Bank of England working papers from Bank of England Bank of England, Threadneedle Street, London, EC2R 8AH. Contact information at EDIRC.
Bibliographic data for series maintained by Digital Media Team ().