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Do Payout Restrictions Reduce Bank Risk?

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Abstract

In June 2020, the Federal Reserve issued stringent payout restrictions for the largest banks in the United States as part of its policy response to the COVID-19 crisis. Similar curbs on share buybacks and dividend payments were adopted in other jurisdictions, including in the eurozone, the U.K., and Canada. Payout restrictions were aimed at enhancing banks’ resiliency amid heightened economic uncertainty and concerns about the risk of large losses. But besides being a tool to build capital buffers and preserve bank equity, payout restrictions may also prevent risk-shifting. This post, which is based on our recent research paper, attempts to answer whether and how payout restrictions reduce bank risk using the U.S. experience during the pandemic as a case study.

Suggested Citation

  • Fulvia Fringuellotti & Thomas Kroen, 2025. "Do Payout Restrictions Reduce Bank Risk?," Liberty Street Economics 20250108, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:99404
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    File URL: https://libertystreeteconomics.newyorkfed.org/2025/01/do-payout-restrictions-reduce-bank-risk/
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    More about this item

    Keywords

    banking; payout restrictions; risk-shifting; prudential regulation;
    All these keywords.

    JEL classification:

    • 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
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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