Tailored microprudential recommendations for bank profit retention using a risk tolerance framework

Petr Jakubík and Bogdan-Gabriel Moinescu

International Review of Economics & Finance, 2025, vol. 98, issue C

Abstract: This study presents a tailored microprudential approach to profit retention by reversing bank failure prediction models within a risk tolerance framework. Using a dataset of approximately 700 European commercial banks from 2012 to 2022, including around 30 failed institutions identified by the European Banking Authority based on notifications of resolution cases and liquidations involving deposit guarantee funds, the research develops several early warning models. These models integrate macrofinancial stress indicators, bank-specific intermediation measures, financial control variables, and capital buffers. The aim is to align prudential expectations for dividend payout ratios with each bank's risk profile, derived from distress probability models. The results propose that banks' dividend policies should be adjusted based on their capital adequacy and failure likelihood, offering a dynamic and risk-based approach to profit retention. These insights are critical for policymakers, supervisors, and bank managers focused on maintaining financial stability and optimizing prudential buffers, while allowing for more flexible capital planning tailored to macroeconomic conditions.

Keywords: Prudential policy; Profit retention recommendations; Bank risk; Reversed early warning system; Capital buffer; Dividend payout ratio (search for similar items in EconPapers)
JEL-codes: G17 G21 G32 G33 G38 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:98:y:2025:i:c:s1059056025001145

DOI: 10.1016/j.iref.2025.103951

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