Bank Capital and Dividend Externalities
62 Pages Posted: 2 Jun 2014
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Bank Capital and Dividend Externalities
Bank Capital and Dividend Externalities
Bank Capital and Dividend Externalities
Date Written: March 2014
Abstract
In spite of mounting losses banks continued to pay dividends during the crisis. We present a model that addresses this behavior. By paying out dividends, a bank transfers value to its shareholders away from creditors, among whom are other banks. This way, one bank's dividend payout policy affects the equity value and risk of default of other banks. When such negative externalities are strong and bank franchise values are not too low, the private equilibrium can feature excess dividends relative to a coordinated policy that maximizes the combined equity value of banks.
Keywords: externalities, financial crises, franchise value, risk-shifting
JEL Classification: G01, G21, G24, G28, G32, G35, G38
Suggested Citation: Suggested Citation
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