Working Paper: NBER ID: w16896
Authors: Viral V. Acharya; Irvind Gujral; Nirupama Kulkarni; Hyun Song Shin
Abstract: The headline numbers appear to show that even as banks and financial intermediaries suffered large credit losses in the financial crisis of 2007-09, they raised substantial amounts of new capital, both from private investors and through government-funded capital injections. However, on closer inspection the composition of bank capital shifted radically from one based on common equity to that based on debt-like hybrid claims such as preferred equity and subordinated debt. The erosion of common equity was exacerbated by large scale payments of dividends, in spite of widely anticipated credit losses. Dividend payments represent a transfer from creditors (and potentially taxpayers) to equity holders in violation of the priority of debt over equity. The dwindling pool of common equity in the banking system may have been one reason for the continued reluctance by banks to lend over this period. We draw conclusions on how capital regulation may be reformed in light of our findings.
Keywords: No keywords provided
JEL Codes: G01; G21; G24; G28; G32; G35; G38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| shift in bank capital composition from common equity to debt-like hybrid claims (F65) | banks' lending behavior (G21) |
| high leverage due to erosion of common equity through dividend payments (G35) | banks' reluctance to lend (G21) |
| continued dividend payments during the crisis (G35) | transfer of resources from creditors to equity holders (G32) |
| transfer of resources from creditors to equity holders (G32) | undermining the priority of debt over equity (G33) |
| capital structure change (G32) | riskier remaining assets of banks (G21) |
| riskier remaining assets of banks (G21) | risk-shifting behavior that benefits equity holders at the expense of creditors (G32) |