Systemic risk-shifting in U.S. commercial banking

This paper puts forward the proposition that U.S. commercial banks use dividends as a mechanism to shift systemic risk to debt-holders and the deposit insurer. Using a mixed data sampling modeling approach, it is shown that monthly systemic risk factors are associated with a positive effect on future quarterly bank dividends indicating systemic risk-shifting. These factors include absorption (Kritzman et al. in MIT working paper, 2010), catfin (Allen et al. in Rev Financ Stud 25:3000–3036, 2012), covar (Adrian and Brunnermeier in CoVaR. NBER Working Paper 17454. National Bureau Economic Research, Cambridge, MA, 2011), delta_covar (Adrian and Brunnermeier 2011, mes (Acharya et al. in Rev Financ Stud 24:2166–2205, 2011b), real_vol (Giglio et al. in J Financ Econ 119:457–471, 2016), and size_con (Giglio et al. 2016). In addition, they can now-cast the upward trend in systemic risk-shifting in the 1990s and the downward trend from the early 2000s to 2007. The findings suggest that the rules governing bank dividends need be revised, support the imposition of a dividend tax to mitigate the negative externalities of dividends as a risk-shifting mechanism, and document a reduced effectiveness of Prompt Corrective Action in controlling risk-shifting.