Working Paper: CEPR ID: DP15615
Authors: Leonardo Gambacorta; Tommaso Oliviero; Hyun Song Shin
Abstract: Banks with a low price-to-book ratio have a greater propensity to pay out dividends. This propensity is especially marked for banks with a price-to-book ratio below a threshold of 0.7. As a sector, banks also tend to have higher dividend payout ratios than non-financial firms. We demonstrate these features using data for 271 advanced economy banks in 30 jurisdictions. Dividend payouts as a proportion of profits rise in a non-linear way as the price-to-book ratio falls below 0.7. In a hypothetical exercise with fixed balance sheet ratios, we find that a complete suspension of bank dividends in 2020 during the Covid-19 pandemic would have added, under different stress scenario, an additional US$ 0.8–1.1 trillion of bank lending capacity in our sample, equivalent to 1.1–1.6% of total GDP.
Keywords: dividend payout policy; banks; low interest rates; COVID-19 crisis
JEL Codes: G21; G35
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Price-to-book ratio (below 0.7) (G32) | Propensity to pay dividends (G35) |
| Suspension of bank dividends during COVID-19 pandemic (G28) | Increase in bank lending capacity (G21) |
| Profitability (measured by return on equity) (G32) | Propensity to pay dividends (G35) |
| Bank size (log of market capitalization) (G21) | Propensity to pay dividends (G35) |
| Total assets growth rate (G19) | Propensity to pay dividends (G35) |