Low Price-To-Book Ratios and Bank Dividend Payout Policies

BIS Working Papers No 907 (2020)

32 Pages Posted: 13 Jan 2021 Last revised: 10 Mar 2021

See all articles by Leonardo Gambacorta

Leonardo Gambacorta

Bank for International Settlements (BIS); Centre for Economic Policy Research (CEPR)

Tommaso Oliviero

CSEF - University of Naples Federico II - Centre for Studies in Economics and Finance (CSEF)

Hyun Song Shin

Bank for International Settlements (BIS)

Date Written: December 9, 2020

Abstract

Banks with a low price-to-book ratio have a greater propensity to pay out dividends. This propensity is especially marked for banks with a price-to-book ratio below a threshold of 0.7. As a sector, banks also tend to have higher dividend payout ratios than non-financial firms. We demonstrate these features using data for 271 advanced economy banks in 30 jurisdictions. Dividend payouts as a proportion of profits rise in a non-linear way as the price-to-book ratio falls below 0.7. In a hypothetical exercise with fixed balance sheet ratios, we find that a complete suspension of bank dividends in 2020 during the Covid-19 pandemic would have added, under different stress scenario, an additional US$ 0.8–1.1 trillion of bank lending capacity in our sample, equivalent to 1.1–1.6% of total GDP.

Keywords: dividend payout policy, banks, low interest rates, COVID-19 crisis

JEL Classification: G21, G35

Suggested Citation

Gambacorta, Leonardo and Oliviero, Tommaso and Shin, Hyun Song, Low Price-To-Book Ratios and Bank Dividend Payout Policies (December 9, 2020). BIS Working Papers No 907 (2020), Available at SSRN: https://ssrn.com/abstract=3761864 or http://dx.doi.org/10.2139/ssrn.3761864

Leonardo Gambacorta (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Tommaso Oliviero

CSEF - University of Naples Federico II - Centre for Studies in Economics and Finance (CSEF) ( email )

Via Cintia
Complesso Monte S. Angelo
Naples, Naples 80126
Italy

Hyun Song Shin

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

HOME PAGE: http://www.bis.org/author/hyun_song_shin.htm

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