Capital Externalities of Systemically Large Banks: Evidence from the Market Value of Smaller Banks

Abstract

We test conflicting theories on the externalities of the payout policy of systemically large banks. We show that the announcement of share buybacks and dividend increases by these banks leads to a negative value effect on non-systemically large banks. The negative value effect is larger under adverse systemic conditions, especially when the announcing bank is poorly capitalized. The results support theories in which banks shift risks to other banks by retaining less equity. Consistent with these theories, different empirical settings show that the Tobin’s Q of non-systemically large banks decreases, and their riskiness increases, when systemically large banks increase their leverage.

Keywords: Payout Policies, Bank Capital, Intra-Industry Effects, Systemic Conditions

JEL Classification: G21, G28, G32