Why European banks adjust their dividend payouts?

Marco Belloni (), Maciej Grodzicki () and Mariusz Jarmuzek
Additional contact information
Marco Belloni: Swiss Re
Maciej Grodzicki: European Central Bank

Journal of Banking Regulation, 2024, vol. 25, issue 3, No 5, 284-304

Abstract: Abstract Economic literature suggests that banks change their dividend payouts for three main reasons. They may be willing to signal good future profitability to shareholders to address information asymmetry, or use dividends to mitigate the agency costs, or could come under pressure from prudential supervisors and regulators to retain earnings. The COVID-19 pandemic led to introduction of sector-wide recommendation by regulators to suspend dividend payouts in view of prevailing large uncertainty. Using a panel data approach for two samples of listed and unlisted European banks, this paper provides evidence that, over a decade and a half preceding the pandemic, bank dividend payouts were adjusted in line with the three motivations found in the literature. The results are robust to selection of alternative variables representing these motivations. Banks are however found not to discount expectations about future economic conditions or their own profitability when making payouts. Simulations shown in the paper suggest that, in the absence of supervisory recommendations, banks would likely have reduced the payouts only slightly in the first year of the pandemic.

Keywords: Bank dividend policy; Banking regulation and supervision; Panel data analysis (search for similar items in EconPapers)
Date: 2024
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Working Paper: Why European banks adjust their dividend payouts? (2023)
Working Paper: Why European Banks Adjust their Dividend Payouts? (2022)
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DOI: 10.1057/s41261-023-00221-y

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