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Bank holding company dividends and repurchases during the financial crisis

  • Hirtle, Beverly

    ()

    (Federal Reserve Bank of New York)

Many large U.S. bank holding companies (BHCs) continued to pay dividends during the recent financial crisis, even as financial market conditions deteriorated, large losses accumulated, and emergency capital and liquidity were being provided by the official sector. In contrast, share repurchases by these BHCs dropped sharply in the early part of the crisis. Documenting this divergent behavior is one of the key contributions of this paper, as previous analysis has tended to focus on dividend payments alone. The paper also examines the role that repurchases played in large BHCs' decisions to reduce or eliminate dividends. Did BHCs with a high level of repurchases prior to the financial crisis cut dividends later, or by less, than BHCs with lower levels of pre-crisis repurchases? The key findings are that the smaller BHCs in the sample (those with assets between $5 billion and $25 billion) with higher levels of repurchases before the financial crisis reduced dividends later and by less than BHCs with lower pre-crisis repurchases. In contrast, larger BHCs with higher pre-crisis repurchases tended to reduce their dividends earlier in the financial crisis, though there is no relationship between pre-crisis repurchases and the size of dividend reductions for these institutions.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 666.

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Length: 38 pages
Date of creation: 01 Mar 2014
Date of revision:
Handle: RePEc:fip:fednsr:666
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  1. Allen Berger & Robert DeYoung & Mark Flannery & David Lee & Özde Öztekin, 2008. "How Do Large Banking Organizations Manage Their Capital Ratios?," Journal of Financial Services Research, Springer, vol. 34(2), pages 123-149, December.
  2. Clifford P. Stephens & Michael S. Weisbach, 1998. "Actual Share Reacquisitions in Open-Market Repurchase Programs," Journal of Finance, American Finance Association, vol. 53(1), pages 313-333, 02.
  3. Enrico Onali, 2012. "Moral hazard, dividends, and risk in banks," Working Papers 12001, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
  4. DeAngelo, Harry & DeAngelo, Linda & Stulz, Rene M., 2006. "Dividend policy and the earned/contributed capital mix: a test of the life-cycle theory," Journal of Financial Economics, Elsevier, vol. 81(2), pages 227-254, August.
  5. Bessler, Wolfgang & Nohel, Tom, 2000. "Asymmetric information, dividend reductions, and contagion effects in bank stock returns," Journal of Banking & Finance, Elsevier, vol. 24(11), pages 1831-1848, November.
  6. Chinmoy Ghosh & J. Randall Woolridge, 1988. "An Analysis Of Shareholder Reaction To Dividend Cuts And Omissions," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 11(4), pages 281-294, December.
  7. Chay, J.B. & Suh, Jungwon, 2009. "Payout policy and cash-flow uncertainty," Journal of Financial Economics, Elsevier, vol. 93(1), pages 88-107, July.
  8. Hirtle, Beverly, 2004. "Stock repurchases and bank holding company performance," Journal of Financial Intermediation, Elsevier, vol. 13(1), pages 28-57, January.
  9. Jagannathan, Murali & Stephens, Clifford P. & Weisbach, Michael S., 2000. "Financial flexibility and the choice between dividends and stock repurchases," Journal of Financial Economics, Elsevier, vol. 57(3), pages 355-384, September.
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