The Dark-Side of Banks’ Nonbank Business: Internal Dividends in Bank Holding Companies
61 Pages Posted: 30 Jan 2018 Last revised: 22 Feb 2019
Date Written: February 8, 2019
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: Suggested Citation