The Dark-Side of Banks’ Nonbank Business: Internal Dividends in Bank Holding Companies

61 Pages Posted: 30 Jan 2018 Last revised: 22 Feb 2019

See all articles by Jonathan Pogach

Jonathan Pogach

FDIC, Division of Insurance and Research

Haluk Unal

University of Maryland - Robert H. Smith School of Business

Date Written: February 8, 2019

Abstract

We show a dark-side view of internal capital markets in which one segment exploits the funding advantage of another profitable segment to relax its financial constraints. Results demonstrate that bank holding companies (BHCs) shield their nonbank segments, and not their bank segments, from inflexible external dividend policies. Further, bank internal dividends are used to support nonbank segment expansion. We show that BHCs whose nonbank activity had been constrained prior to the passage of the Gramm-Leach-Bliley Act increased their bank segments’ payout ratios by 12 percentage points relative to those that had not been constrained.

Keywords: internal capital markets, dividends, bank, nonbank, financial constraints

JEL Classification: D29, G21, G23, G28, G34, G35, L25

Suggested Citation

Pogach, Jonathan and Unal, Haluk, The Dark-Side of Banks’ Nonbank Business: Internal Dividends in Bank Holding Companies (February 8, 2019). FDIC Center for Financial Research Paper No. 2018-01, Available at SSRN: https://ssrn.com/abstract=3112697 or http://dx.doi.org/10.2139/ssrn.3112697

Jonathan Pogach (Contact Author)

FDIC, Division of Insurance and Research ( email )

550 17th Street NW
Washington, DC 20429
United States

Haluk Unal

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States
301-405-2256 (Phone)
301-405 0359 (Fax)

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