Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/210872
Authors: 
Muñoz, Manuel
Year of Publication: 
2019
Series/Report no.: 
ESRB Working Paper Series 97
Abstract: 
The paper investigates the effectiveness of dividend-based macroprudential rules in complementing capital requirements to promote bank soundness and sustained lending over the cycle. First, some evidence on bank dividends and earnings in the euro area is presented. When shocks hit their profits, banks adjust retained earnings to smooth dividends. This generates bank equity and credit supply volatility. Then, a DSGE model with key financial frictions and a banking sector is developed to assess the virtues of what shall be called dividend prudential targets. Welfare-maximizing dividend-based macroprudential rules are shown to have important properties: (i) they are effective in smoothing the financial and the business cycle by means of less volatile bank retained earnings, (ii) they induce welfare gains associated to a Basel III-type of capital regulation, (iii) they mainly operate through their cyclical component, ensuring that long-run dividend payouts remain unaffected, (iv) they are flexible enough so as to allow bank managers to optimally deviate from the target (conditional on the payment of a sanction), and (v) they are associated to a sanctions regime that acts as an insurance scheme for the real economy.
Subjects: 
macroprudential regulation
capital requirements
dividend prudential target
finanancial stability
bank dividends
JEL: 
E44
E61
G21
G28
G35
Persistent Identifier of the first edition: 
ISBN: 
978-92-9472-111-2
Document Type: 
Working Paper

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