Discussion Paper Details

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Title: Bank Capital and Dividend Externalities

Author(s): Viral V. Acharya, Hanh Le and Hyun Song Shin

Publication Date: March 2014

Keyword(s): externalities, financial crises, franchise value and risk-shifting

Programme Area(s): Financial Economics

Abstract: In spite of mounting losses banks continued to pay dividends during the crisis. We present a model that addresses this behavior. By paying out dividends, a bank transfers value to its shareholders away from creditors, among whom are other banks. This way, one bank's dividend payout policy affects the equity value and risk of default of other banks. When such negative externalities are strong and bank franchise values are not too low, the private equilibrium can feature excess dividends relative to a coordinated policy that maximizes the combined equity value of banks.

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Bibliographic Reference

Acharya, V, Le, H and Shin, H. 2014. 'Bank Capital and Dividend Externalities'. London, Centre for Economic Policy Research.