Faculty of Business Seminar Series / Levent Güntay

Title: Proving Approval: Bank Dividends, Regulation, and Runs

 Abstract: Bank stability depends on information. Regulators can allow banks to release some information about their safety and soundness. This paper shows how dividend regulation and information interact to affect bank stability. In the model, wealth-expropriation, excess cash flow, and signaling incentives affect a bank’s decision to pay dividends. The regulator aims to prevent wealth expropriation through dividend restrictions on undercapitalized banks. However, this action increases the banks’ incentives to pay dividends for signaling. Signaling incentives are further exacerbated in the presence of bank runs. We show that the first best solution is achievable through dividend restrictions only if capital requirements are sufficiently high. Furthermore, a more restrictive dividend regulatory policy is optimal in stressed economic environments, when banks are more run-prone, allowing the weak banks to pool with strong.

Place: Meeting Room AB2 345