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System-wide Dividend Restrictions: Evidence and Theory

Author

Listed:
  • Miguel Ampudia
  • Manuel A. Muñoz
  • Frank Smets
  • Alejandro Van der Ghote
Abstract
We provide evidence that the ECB system-wide dividend recommendation (SWDR) of March 2020 contributed to sustain lending, had a negative but moderate and transitory impact on bank stock prices and largely operated as a deferral of dividend payouts rather than as a dividend cut. Then, we develop a quantitative macro-banking DSGE model that accounts for this evidence and captures the key mechanism through which SWDRs operate to study the general equilibrium effects of the ECB SWDR. The measure contributed to sustain aggregate bank lending and mitigate the adverse impact of the COVID-19 shock on economic activity by safeguarding euro area banks’ capitalization. Welfare-maximizing SWDRs stabilize the economy regardless of the shock type but they only induce significant welfare gains in response to financial shocks.

Suggested Citation

  • Miguel Ampudia & Manuel A. Muñoz & Frank Smets & Alejandro Van der Ghote, 2023. "System-wide Dividend Restrictions: Evidence and Theory," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 23/1075, Ghent University, Faculty of Economics and Business Administration.
    • Handle: RePEc:rug:rugwps:23/1075
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    File URL: http://wps-feb.ugent.be/Papers/wp_23_1075.pdf
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    References listed on IDEAS

    as
    1. Andreeva, Desislava & Bochmann, Paul & Schneider, Julius, 2023. "Evaluating the impact of dividend restrictions on euro area bank market values," Working Paper Series 2787, European Central Bank.
    2. Dautović, Ernest & Gambacorta, Leonardo & Reghezza, Alessio, 2023. "Supervisory policy stimulus: evidence from the euro area dividend recommendation," Working Paper Series 2796, European Central Bank.
    3. Jose M. Berrospide & Arun Gupta & Matthew P. Seay, 2021. "Un-used Bank Capital Buffers and Credit Supply Shocks at SMEs during the Pandemic," Finance and Economics Discussion Series 2021-043, Board of Governors of the Federal Reserve System (U.S.).
    4. Asim Ijaz Khwaja & Atif Mian, 2008. "Tracing the Impact of Bank Liquidity Shocks: Evidence from an Emerging Market," American Economic Review, American Economic Association, vol. 98(4), pages 1413-1442, September.
    5. José Abad & Antonio I Garcia Pascual, 2022. "Usability of Bank Capital Buffers: The Role of Market Expectations," IMF Working Papers 2022/021, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Fulvia Fringuellotti & Thomas Kroen, 2024. "Payout Restrictions and Bank Risk-Shifting," Staff Reports 1123, Federal Reserve Bank of New York.
    2. Sanders, Emiel & Simoens, Mathieu & Vander Vennet, Rudi, 2024. "Curse and blessing: The effect of the dividend ban on euro area bank valuations and syndicated lending," Journal of Banking & Finance, Elsevier, vol. 163(C).

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    More about this item

    Keywords

    dividend recommendation; dividend prudential target (DPT); COVID-19; usable capital buffers; welfare;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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