Should Bank Dividends Be Regulated? What Is the Long-Term Historical Evidence?

42 Pages Posted: 2 Dec 2020 Last revised: 26 Feb 2021

See all articles by Anthony Saunders

Anthony Saunders

New York University - Leonard N. Stern School of Business

Berry K. Wilson

Pace University

Date Written: December 1, 2020

Abstract

The issue of bank dividend regulation has become highly controversial as the stress induced on bank capital during the 2008 financial crisis and the covid pandemic created a demand for enhanced regulation and restrictions on bank dividend payments. This paper examines this issue from a historical perspective by analyzing the dividend decisions of a sample of central-reserve-city banks during the Great Depression and its aftermath to 1973, and in particular the active risk management role that dividend policy may have played for study banks. Dividend policy was used to balance the interests of stockholders and depositors, and to preserve the long-term solvency of the bank. Overall our study results show that despite an initial reluctance to cut dividends, banks cut dividend levels by 24% in 1932 and by 12.7% in 1933 (in median terms). Post-Great Depression dividends remained at depressed levels through most of the 1930s and 1940s. Our study results indicate that this period of depressed and relatively constant dividends allowed banks to rebuild capital levels, which had fallen sharply with the Great Depression. Capital rebuilding post-depression represented risk-shifting in favor of depositors and likely contributed to the stability of the U.S. banking system in the post-depression era.

Keywords: Safety and soundness, dividend policy, Great Depression

JEL Classification: G21, G28, G35

Suggested Citation

Saunders, Anthony and Wilson, Berry K., Should Bank Dividends Be Regulated? What Is the Long-Term Historical Evidence? (December 1, 2020). NYU Stern School of Business Forthcoming, Available at SSRN: https://ssrn.com/abstract=3740258 or http://dx.doi.org/10.2139/ssrn.3740258

Anthony Saunders (Contact Author)

New York University - Leonard N. Stern School of Business ( email )

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212-998-0711 (Phone)
212-995-4220 (Fax)

Berry K. Wilson

Pace University ( email )

One Pace Plaza
White Plains, NY New York 10603
United States

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