Macroprudential Policy with Capital Buffers
28 Pages Posted: 18 Mar 2021
Date Written: January 1, 2021
Financial regulation imposes equity buffers on banks by restricting dividends. This paper studies constrained-efficient dividend policy when banks fund loans with equity and debt. In the model, bank shareholders consider equity costly and a bank’s access to debt depends on its shareholder value. In response to loan losses banks cut dividends, but eventually defer dividends too much. They do not internalize that a commitment to higher dividends (and fewer loans) during recoveries from financial crises would increase shareholder value and access to debt during crises. Constrained-efficient dividends, while restricted during normal times and zero during crises, are higher during recoveries.
Keywords: Financial intermediation, Macroprudential capital regulation, Dividend restrictions
JEL Classification: E32, E51, G18, G28
Suggested Citation: Suggested Citation