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Supervisory policy stimulus: evidence from the euro area dividend recommendation

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  • Ernest Dautović
  • Leonardo Gambacorta
  • Alessio Reghezza

Abstract

At the onset of the Covid-19 outbreak, central banks and supervisors introduced dividend restrictions as a new policy instrument aimed at supporting lending to the real economy and strengthening banks' capacity to absorb losses. In this paper we estimate the impact of the ECB's dividend recommendation on bank lending and risk-taking. To address identification issues, we rely on credit registry data and a direct measure that captures variation in compliance with the recommendation across banks in the euro area. The analysis disentangles the confounding effects stemming from the wide range of monetary and fiscal policies that supported credit during the Covid-19 downturn and investigates their interaction with the dividend recommendation. We find that dividend restrictions have been an effective policy in supporting financially constrained firms, adding capital space to banks, and limiting some forms of procyclical behaviour. The effects on lending are larger for small and medium enterprises and for firms operating in Covid-19 vulnerable sectors. At the same time, we do not find evidence of a significant increase in lending to riskier borrowers and "zombie" firms.

Suggested Citation

  • Ernest Dautović & Leonardo Gambacorta & Alessio Reghezza, 2023. "Supervisory policy stimulus: evidence from the euro area dividend recommendation," BIS Working Papers 1085, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:1085
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    Cited by:

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    2. Rasha Istaiteyeh, 2024. "Short-and Long-run Influence of COVID-19 on Jordan's Economy," Advances in Management and Applied Economics, SCIENPRESS Ltd, vol. 14(1), pages 1-1.
    3. Acosta-Smith, Jonathan & Barunik, Jozef & Gerba, Eddie & Katsoulis, Petros, 2024. "Moderation or indulgence? Effects of bank distribution restrictions during stress," Bank of England working papers 1053, Bank of England.
    4. Emiel Sanders & Mathieu Simoens & Rudi Vander Vennet, 2023. "Curse and blessing: the effect of the dividend ban on euro area bank valuations and syndicated lending," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 23/1078, Ghent University, Faculty of Economics and Business Administration.
    5. Carlos Canizares Martinez, 2023. "Leaning against housing booms fueled by credit," Working and Discussion Papers WP 9/2023, Research Department, National Bank of Slovakia.
    6. Marsh, W. Blake, 2023. "Supervisory stringency, payout restrictions, and bank equity prices," Journal of Banking & Finance, Elsevier, vol. 154(C).

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    More about this item

    Keywords

    dividend restrictions; supervisory policy; credit supply; European Central Bank; Covid-19;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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