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Macroprudential policy with capital buffers

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  • Schroth, Josef

Abstract

Financial regulation imposes equity buffers on banks by restricting dividends. This paper studies constrained-efficient dividend policy when banks fund loans with equity and debt. In the model, bank shareholders consider equity costly and a bank’s access to debt depends on its shareholder value. In response to loan losses banks cut dividends, but eventually defer dividends too much. They do not internalize that a commitment to higher dividends (and fewer loans) during recoveries from financial crises would increase shareholder value and access to debt during crises. Constrained-efficient dividends, while restricted during normal times and zero during crises, are higher during recoveries.

Suggested Citation

  • Schroth, Josef, 2021. "Macroprudential policy with capital buffers," Journal of Monetary Economics, Elsevier, vol. 118(C), pages 296-311.
  • Handle: RePEc:eee:moneco:v:118:y:2021:i:c:p:296-311
    DOI: 10.1016/j.jmoneco.2020.12.003
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    Cited by:

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    3. Josef Schroth, 2021. "On the Distributional Effects of Bank Bailouts," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 40, pages 252-277, April.
    4. David Chen & Christian Friedrich, 2021. "The Countercyclical Capital Buffer and International Bank Lending: Evidence from Canada," Staff Working Papers 21-61, Bank of Canada.

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    More about this item

    Keywords

    Financial intermediation; Macroprudential capital regulation; Dividend restrictions;
    All these keywords.

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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