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Payout Restrictions and Bank Risk-Shifting

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Abstract

What are the effects of payout restrictions on bank risk-shifting? To answer this question, we exploit the restriction policies imposed during the Covid-crisis on US banks as a natural experiment. Using a high-frequency differences-in-differences empirical strategy, we show that, when share buybacks are banned and dividends restricted, banks’ equity prices fall while their CDS spreads and bond yields decline. These results indicate that payout restrictions shift risk from debtholders into equityholders. Consistent with a risk-shifting channel, we find that these effects revert once restrictions are lifted. Moreover, banks that are ex-ante more reliant on share buybacks than dividends in their payout policies, decrease risk-taking relative to banks that are ex ante more dividends reliant, with those effects reverting when the restrictions are relaxed. These results indicate that payout and risk-taking choices are complementary and that regulatory payout restrictions endogenously affect bank risk-shifting incentives.

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  • Fulvia Fringuellotti & Thomas Kroen, 2024. "Payout Restrictions and Bank Risk-Shifting," Staff Reports 1123, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:98924
    DOI: 10.59576/sr.1123
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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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