Covid-19 bank dividend payout restrictions: effects and trade-offs

In the context of the Covid crisis, authorities adopted dividend payout restrictions to enhance bank resilience and support stronger growth in bank lending. Restrictions may reduce short-term equity returns for bank shareholders, especially in the case of banks with a low price-to-book ratio. In line with these predictions, bank equity prices fell with dividend restriction announcements, but credit default swap (CDS) spreads indicated that default risk either fell or was unaffected, even in the face of the economic downturn. Bank capitalisation rose in jurisdictions which restricted payouts, supporting institutional and systemwide stability; the increased capital was more likely to support greater lending with restrictions present.