 Dividends and Bank Capital in the Global Financial Crisis of 2007-2009Journal of Financial Crises, 2022, vol. 4, issue 2, 1-39 Abstract: The headline numbers appear to show that even as banks and financial intermediaries suffered large credit losses in the Global Financial Crisis of 2007-2009, they raised substantial amounts of new capital, both from private investors and from government-funded capital injections. However, on closer inspection, the composition of bank capital shifted radically from one based on common equity to that based on debt-like hybrid claims such as preferred equity and subordinated debt. The erosion of common equity was exacerbated by large-scale payments of dividends, in spite of widely anticipated credit losses. Dividend payments represent a transfer from creditors (and potentially taxpayers) to equity holders in violation of the priority of debt over equity. The dwindling pool of common equity in the banking system may have been one reason for the continued reluctance by banks to lend over this period. We draw conclusions on how capital regulation may be reformed in light of our findings. Keywords: capital requirements; common equity; dividends; financial crisis; irrational markets; share buy backs (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:ysm:ypfsfc:v:4:y:2022:i:2:p:1-39 Access Statistics for this article More articles in Journal of Financial Crises from Yale Program on Financial Stability (YPFS) Contact information at EDIRC. |
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