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

43 Pages Posted: 21 Mar 2011

See all articles by Viral V. Acharya

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)

Nirupama Kulkarni

University of California, Berkeley - Haas School of Business

Hyun Song Shin

Bank for International Settlements (BIS)

Multiple version iconThere are 3 versions of this paper

Date Written: March 2011

Abstract

The headline numbers appear to show that even as banks and financial intermediaries suffered large credit losses in the financial crisis of 2007-09, they raised substantial amounts of new capital, both from private investors and through 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.

Suggested Citation

Acharya, Viral V. and Gujral, Irvind and Kulkarni, Nirupama and Shin, Hyun Song, Dividends and Bank Capital in the Financial Crisis of 2007-2009 (March 2011). NBER Working Paper No. w16896. Available at SSRN: https://ssrn.com/abstract=1789477

Viral V. Acharya (Contact Author)

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

44 West 4th Street
Suite 9-160
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)

London
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)

Nirupama Kulkarni

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

Hyun Song Shin

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

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

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