Dividends and Bank Capital in the Financial Crisis of 2007-2009

36 Pages Posted: 20 Mar 2009 Last revised: 10 Nov 2010

Viral V. Acharya

New York University - Leonard N. Stern School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); New York University (NYU) - Department of Finance

Irvind Gujral

London Business School (MBA 2007)

Hyun Song Shin

Bank for International Settlements

Multiple version iconThere are 3 versions of this paper

Date Written: March 18, 2009

Abstract

The headline numbers appear to show that even as banks and financial intermediaries have suffered large credit losses in the financial crisis of 2007-09, they have 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 has 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 has been exacerbated by large scale payments of dividends, in spite of widely anticipated credit losses. Dividend payments represent a transfer from creditors (and taxpayers) to equityholders in violation of the priority of debt over equity. The dwindling pool of common equity in the banking system may be one reason for the continued reluctance to lend by banks. We draw conclusions on how capital regulation may be reformed in light of our findings.

Keywords: Credit Crisis, Bank Capital, Dividends

JEL Classification: G21, G28

Suggested Citation

Acharya, Viral V. and Gujral, Irvind and Shin, Hyun Song, Dividends and Bank Capital in the Financial Crisis of 2007-2009 (March 18, 2009). Available at SSRN: https://ssrn.com/abstract=1362299 or http://dx.doi.org/10.2139/ssrn.1362299

Viral V. Acharya

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
New York, NY NY 10012
United States

HOME PAGE: http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/~vacharya.htm

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Irvind Gujral

London Business School (MBA 2007) ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
+44 790 345 7681 (Phone)

Hyun Song Shin (Contact Author)

Bank for International Settlements ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

HOME PAGE: http://www.bis.org/author/hyun_song_shin.htm

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