Rethinking capital regulation: the case for a dividend prudential target
Manuel A. Muñoz
No 2433, Working Paper Series from European Central Bank
Recent empirical studies have documented two remarkable patterns shown by euro area banks in the aftermath of the Great Recession: (i) their tendency to boost capital ratios by shrinking assets (contraction of loans supply), and (ii) their reluctance to cut back on dividends (fall in retained earnings). First, I provide evidence of a potential link between these two trends. When shocks hit their profits, banks tend to adjust retained earnings to smooth dividends. This generates bank equity and credit supply volatility. Then I develop a DSGE model that incorporates this mechanism to study the transmission and effects of a novel macroprudential policy rule - that I shall call Dividend Prudential Target (DPT) - aimed at complementing existing capital regulation by tackling this issue. Welfare-maximizing DPTs are effective (more than the CCyB) in smoothing the financial and the business cycle (by means of less volatile retained earnings) and induce significant welfare gains associated to a Basel III-type of capital regulation through various channels. JEL Classification: E44, E61, G21, G28, G35
Keywords: capital requirements; countercyclical capital buffer (CCyB); dividend restrictions; DSGE models; macroprudential policy (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge and nep-mac
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Working Paper: Rethinking capital regulation: the case for a dividend prudential target (2019)
Working Paper: Rethinking Capital Regulation: The Case for a Dividend Prudential Target (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20202433
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