Macroprudential Policy with Capital Buffers

28 Pages Posted: 18 Mar 2021

See all articles by Josef Schroth

Josef Schroth

Government of Canada - Bank of Canada

Multiple version iconThere are 2 versions of this paper

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

Schroth, Josef, Macroprudential Policy with Capital Buffers (January 1, 2021). Journal of Monetary Economics, Forthcoming, Available at SSRN: or

Josef Schroth (Contact Author)

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9

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