Bank Capital and Dividend Externalities

56 Pages Posted: 15 Sep 2016  

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

Hanh Le

University of Illinois at Chicago

Hyun Song Shin

Bank for International Settlements

Multiple version iconThere are 4 versions of this paper

Date Written: September 2016

Abstract

Dividend payouts affect the relative value of claims within a firm. When firms have contingent claims on each other, as in the banking sector, dividend payouts can shift the relative value of stakeholders' claims across firms. Through this channel, one bank's capital policy affects the equity value and risk of default of other banks. In a model where such externalities are strong, bank capital takes on the attribute of a public good, where the private equilibrium features excessive dividends and inefficient recapitalization relative to the efficient policy that maximizes banking sector equity. We compare the implications of the model with observed bank behavior during the crisis of 2007-09.

Keywords: bank dividends, capital erosion, systemic risk

JEL Classification: G01, G21, G24, G28, G32, G35, G38

Suggested Citation

Acharya, Viral V. and Le, Hanh and Shin, Hyun Song, Bank Capital and Dividend Externalities (September 2016). BIS Working Paper No. 580. Available at SSRN: https://ssrn.com/abstract=2838298

Viral V. Acharya (Contact Author)

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

Hanh Le

University of Illinois at Chicago ( email )

1200 W Harrison St
Chicago, IL 60607
United States

Hyun Song Shin

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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