Dividends and Bank Capital in the Financial Crisis of 2007-2009

Viral Acharya, Irvind Gujral, Nirupama Kulkarni and Hyun Song Shin

No 16896, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The headline numbers appear to show that even as banks and financial intermediaries suffered large credit losses in the financial crisis of 2007-09, they raised substantial amounts of new capital, both from private investors and through government-funded capital injections. However, on closer inspection the composition of bank capital shifted radically from one based on common equity to that based on debt-like hybrid claims such as preferred equity and subordinated debt. The erosion of common equity was exacerbated by large scale payments of dividends, in spite of widely anticipated credit losses. Dividend payments represent a transfer from creditors (and potentially taxpayers) to equity holders in violation of the priority of debt over equity. The dwindling pool of common equity in the banking system may have been one reason for the continued reluctance by banks to lend over this period. We draw conclusions on how capital regulation may be reformed in light of our findings.

JEL-codes: G01 G21 G24 G28 G32 G35 G38 (search for similar items in EconPapers)
Date: 2011-03
Note: CF
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Citations: View citations in EconPapers (68)

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Working Paper: Dividends and Bank Capital in the Financial Crisis of 2007-2009 (2012)
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