Rethinking capital regulation: The case for a dividend prudential target

Arbeitspapier

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 pro…ts, 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 signi…cant welfare gains associated to a Basel III-type of capital regulation through various channels.

Object Details

• ISBN: 978-92-899-4076-4
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ECB Working Paper ; No. 2433

Classification and Topics

• Classification: Wirtschaft ; Financial Markets and the Macroeconomy ; Policy Objectives; Policy Designs and Consistency; Policy Coordination ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Financial Institutions and Services: Government Policy and Regulation ; Payout Policy
• Subject: dividend restrictions ; countercyclical capital bu¤ ; er (CCyB) ; capital requirements ; macroprudential policy ; DSGE models

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Muñoz, Manuel A.
• Event: Veröffentlichung
• (who): European Central Bank (ECB)
• (where): Frankfurt a. M.
• (when): 2020

Further information

• DOI: doi:10.2866/648900
• Handle: http://hdl.handle.net/10419/229047
• Last update: 10.03.2025, 11:44 AM CET