Optimal Resolution Procedures and Dividend Policy for Global-Systemically-Important-Banks

Following the global financial crisis of 2007-2009, bank regulators have adopted special resolution procedures for global systemically important banks. They now have the power to seize these banks when their capital falls below some threshold, and to sell them back to new investors after having restructured them. This paper characterizes the optimal intervention thresholds and studies the interactions with the dividend and equity issuance policies of global systemically important banks. The main findings of our analysis for the optimal regulatory policy are: First, when the restructuring costs are high, it is optimal for regulators to impose dividend payout restrictions for undercapitalized banks. Second, in states of the economy, where capital supply becomes more scarce, these results are aggravated. In particular, regulators intervene relatively earlier, set stricter dividend payout restrictions and require relatively higher initial capital of the banks. Finally, capital supply constraints have an important impact on the financing decisions of shareholders. Banks recapitalize less frequently when the cost of raising equity is high or when the external capital supply is plentiful.