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Macroprudential policy with capital buffers

Josef Schroth

Journal of Monetary Economics, 2021, vol. 118, issue C, 296-311

Abstract: Financial regulation imposes equity buffers on banks by restricting dividends. This paper studies constrained-efficient dividend policy when banks fund loans with equity and debt. In the model, bank shareholders consider equity costly and a bank’s access to debt depends on its shareholder value. In response to loan losses banks cut dividends, but eventually defer dividends too much. They do not internalize that a commitment to higher dividends (and fewer loans) during recoveries from financial crises would increase shareholder value and access to debt during crises. Constrained-efficient dividends, while restricted during normal times and zero during crises, are higher during recoveries.

Keywords: Financial intermediation; Macroprudential capital regulation; Dividend restrictions (search for similar items in EconPapers)
Date: 2021
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Working Paper: Macroprudential Policy with Capital Buffers (2019) Downloads
Working Paper: Macroprudential policy with capital buffers (2019) Downloads
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DOI: 10.1016/j.jmoneco.2020.12.003

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