Featured Product

    ESRB Evaluates Effectiveness of Dividend-Based Prudential Regulation

    July 01, 2019

    ESRB published a working paper that investigates the effectiveness of dividend-based macro-prudential rules in complementing capital requirements to promote bank soundness and sustained lending. Available evidence on euro area bank dividends and earnings suggests there is a potential link between the payout policies and the adjustment mechanisms, through which bankers opt to meet their target regulatory capital ratios. This paper develops a Dynamic Stochastic General Equilibrium (DSGE) model that features a banking sector and certain financial frictions that account for this empirical phenomenon. Then, it defines a dividend-based regulatory scheme that is shown to be an effective macro-prudential complement to capital requirements.

    The paper presents empirical evidence on bank dividends and earnings in the euro area. It describes the basic model and identifies the transmission mechanism through which a dividend prudential target improves bank soundness and financial stability. Further it presents the extended model to improve the matching of the model to the data and develops a quantitative exercise to assess the welfare effects of the proposed policy and its interactions with regulatory capital ratios. Welfare-maximizing dividend-based macro-prudential rules are shown to have important properties:

    • They are effective in smoothing the financial and the business cycle by means of less volatile bank retained earnings
    • They induce welfare gains associated to a Basel III-type of capital regulation
    • They mainly operate through their cyclical component, ensuring that long-run dividend payouts remain unaffected
    • They are flexible enough so as to allow bank managers to optimally deviate from the target (conditional on the payment of a sanction)
    • They are associated to a sanctions regime that acts as an insurance scheme for the real economy

    The paper highlights that simplicity of the model is instrumental to clearly identify the transmission mechanism through which the proposed policy rule operates. Yet, it comes at the cost of abstracting from a number of considerations that potentially constitute promising avenues for future research. Modeling one or more of the market imperfections that may be behind bank dividend policies should be helpful to match the data by means of an improved micro foundation of the macro-economic model. Moreover, additional ingredients that are present in reality and that could possibly change some of the results have been omitted. The paper concludes that optimal coordination between this type of prudential regulation and other macroeconomic policies should be considered as well.

     

    Related Link: Working Paper (PDF)

     

    Keywords: Europe, EU, Banking, Securities, DSGE Model, Macro-Prudential Regulation, Capital Requirements, Dividend-Based Rules, Financial Stability, Basel III, ESRB

    Featured Experts
    Related Articles
    News

    PRA Revises Branch Return and Updates Guidance for Regulatory Reports

    PRA published the policy statement PS17/19, which contains the final policy related to changes in the format and content of the Branch Return Form and reporting guidance.

    September 12, 2019 WebPage Regulatory News
    News

    FINMA Outlines Treatment of Stablecoins in Supplement to Guide on ICO

    FINMA published a supplement to its initial coin offerings (ICOs) guidelines, outlining the treatment for stablecoins under the Swiss supervisory law.

    September 11, 2019 WebPage Regulatory News
    News

    Ursula von der Leyen Presents Structure of Next European Commission

    President-elect Ursula von der Leyen has presented her team and the new structure of the next European Commission.

    September 10, 2019 WebPage Regulatory News
    News

    FED Proposes to Revise and Extend Reporting Form on Systemic Risk

    FED proposed to extend for three years, with revision, the Banking Organization Systemic Risk Report (FR Y-15; OMB No. 7100-0352).

    September 10, 2019 WebPage Regulatory News
    News

    EBA Issues Revised List of Validation Rules for Reporting

    EBA published the revised list of validation rules (version 2.9) in its implementing technical standards on supervisory reporting.

    September 10, 2019 WebPage Regulatory News
    News

    Bundesbank Publishes Supplementary Validation Rules for Reporting

    Bundesbank published the updated document containing supplementary validation rules in the context of the implementation of the reporting system at national level.

    September 10, 2019 WebPage Regulatory News
    News

    APRA Licenses Xinja Bank as Authorized Deposit-Taking Institution

    APRA granted Xinja Bank Limited a license to operate as an authorized deposit-taking institution without restrictions, under the Banking Act 1959.

    September 09, 2019 WebPage Regulatory News
    News

    FDIC Proposes Revisions to Regulations on Interest Rate Restrictions

    FDIC proposed revisions to its regulations covering interest rate restrictions that apply to less than well-capitalized insured depository institutions.

    September 09, 2019 WebPage Regulatory News
    News

    EBA Intends to Clarify End-Treatment of Grandfathered Instruments

    EBA announced its intention to clarify the prudential treatment applicable to own funds instruments at the end of the grandfathering period, which expires on December 31, 2021.

    September 09, 2019 WebPage Regulatory News
    News

    IMF Releases Reports on 2019 Article IV Consultation with Saudi Arabia

    IMF published its staff report and selected issues report in context of the 2019 Article IV consultation with Saudi Arabia.

    September 09, 2019 WebPage Regulatory News
    RESULTS 1 - 10 OF 3799