The impact on bank lending and risk-taking
In March 2020, at the onset of the COVID crisis, the ECB recommended that euro area banks not pay dividends or buy back shares in an effort to support firm lending. In this paper, Dautović et al. estimate the impact of the ECB’s dividend recommendation on bank lending and risk-taking. The authors compare the credit supply of banks affected by the ECB recommendation with a group of unaffected banks, controlling, most importantly, for the impact on credit from the other monetary and fiscal measures implemented during COVID. They use credit registry data and a direct measure that captures differences in compliance with the dividend recommendation across banks in the euro area.
We find that dividend restrictions have been an effective policy in supporting financially constrained firms, adding capital space to banks, and restricting procyclical behaviour. In particular, the study finds that on average complying banks’ credit supply to non-financial corporations was on average 2.2 percentage points stronger. The effects on lending are larger for small and medium enterprises and for firms operating in sectors that were exposed to the effects of Covid-19. We also find evidence that the dividend recommendation has sustained bank lending even in the absence of government guarantees.
Supervisory policy stimulus: evidence from the euro area dividend recommendation
Authors: Ernest Dautović, Leonardo Gambacorta, Alessio Reghezza
From: ECB
The impact on bank share prices
In this paper, Andreeva et al. analyze the impact of the recommendation on banks’ market values. The authors use difference-in-difference regressions, looking at changes in listed euro area banks’ market values around the announcement date of the ECB recommendation. They find:
- Bank market values declined by about 7% relative to those of non-financial firms over the two weeks following the announcements.
- Banks that were planning to pay dividends lost around 9 percentage points more compared to their peers without a dividend proposal.
- There was s short-lived negative impact on the share prices of non-dividend-paying banks relative to those of non-financial firms, indicating an increase in the equity risk premium for the entire banking sector.
- Around 5% of the 13% decline in the EURO STOXX Banks index was due to the associated increase in bank cost of equity.
[A]ny associated increase in banks’ cost of equity runs against the objective of the measure: it worsens banks’ access to new equity capital and – if sustained – can increase the borrowing costs of households and non-financial firms. The overall efficiency of dividend restrictions can therefore improve if this specific side effect is minimized, notably by proactively managing market expectations about the duration, frequency and severity of regulatory interventions in payout decisions.
Evaluating the impact of dividend restrictions on euro area bank market values
Authors: Desislava Andreeva, Paul Bochmann, Julius Schneider
From: ECB
