DP15615 Low price-to-book ratios and bank dividend payout policies

Author(s): Leonardo Gambacorta, Tommaso Oliviero, Hyun Song Shin
Publication Date: December 2020
Keyword(s): banks, COVID-19 crisis, dividend payout policy, Low interest rates
JEL(s): G21, G35
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15615

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$ 0.8â??1.1 trillion of bank lending capacity in our sample, equivalent to 1.1â??1.6% of total GDP.