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Rethinking capital regulation: the case for a dividend prudential target

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  • Muñoz, Manuel A.

Abstract

Recent empirical studies have documented two remarkable patterns shown by euro area banks in the aftermath of the Great Recession: (i) their tendency to boost capital ratios by shrinking assets (contraction of loans supply), and (ii) their reluctance to cut back on dividends (fall in retained earnings). First, I provide evidence of a potential link between these two trends. When shocks hit their profits, banks tend to adjust retained earnings to smooth dividends. This generates bank equity and credit supply volatility. Then I develop a DSGE model that incorporates this mechanism to study the transmission and effects of a novel macroprudential policy rule - that I shall call Dividend Prudential Target (DPT) - aimed at complementing existing capital regulation by tackling this issue. Welfare-maximizing DPTs are effective (more than the CCyB) in smoothing the financial and the business cycle (by means of less volatile retained earnings) and induce significant welfare gains associated to a Basel III-type of capital regulation through various channels. JEL Classification: E44, E61, G21, G28, G35

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  • Muñoz, Manuel A., 2020. "Rethinking capital regulation: the case for a dividend prudential target," Working Paper Series 2433, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20202433
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Rethinking capital regulation: the case for a dividend prudential target
      by Christian Zimmermann in NEP-DGE blog on 2019-08-16 03:24:39

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    Cited by:

    1. Muñoz, Manuel A., 2020. "Macroprudential policy and the role of institutional investors in housing markets," Working Paper Series 2454, European Central Bank.
    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).
    3. Lorenzo Burlon & Manuel A. Muñoz & Frank Smets, 2024. "The Optimal Quantity of CBDC in a Bank-Based Economy," American Economic Journal: Macroeconomics, American Economic Association, vol. 16(4), pages 172-217, October.

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    More about this item

    Keywords

    capital requirements; countercyclical capital buffer (CCyB); dividend restrictions; DSGE models; macroprudential policy;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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