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

45 Pages Posted: 1 Mar 2012

See all articles by Viral V. Acharya

Viral V. Acharya

New York University (NYU) - Leonard N. Stern School of Business; New York University (NYU) - Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

Irvind Gujral

London Business School (MBA 2007)

Nirupama Kulkarni

University of California, Berkeley - Haas School of Business

Hyun Song Shin

Bank for International Settlements (BIS)

Multiple version iconThere are 3 versions of this paper

Date Written: February 2012

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.

Keywords: asset substitution, crisis, regulatory capital, risk-shifting

JEL Classification: G21, G28, G32, G35, G38

Suggested Citation

Acharya, Viral V. and Acharya, Viral V. and Gujral, Irvind and Kulkarni, Nirupama and Shin, Hyun Song, Dividends and Bank Capital in the Financial Crisis of 2007-2009 (February 2012). CEPR Discussion Paper No. DP8801, Available at SSRN: https://ssrn.com/abstract=2013772

Viral V. Acharya (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business ( email )

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New York University (NYU) - Department of Finance ( email )

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Irvind Gujral

London Business School (MBA 2007) ( email )

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Nirupama Kulkarni

University of California, Berkeley - Haas School of Business ( email )

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Hyun Song Shin

Bank for International Settlements (BIS) ( email )

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Switzerland

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

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