rethinking capital regulation: the case for a dividend ...€¦ · rethinking capital regulation:...

Rethinking Capital Regulation: The Case for a Dividend Prudential TargetManuel Muñoz

Documentos de TrabajoNo 68

Rethinking Capital Regulation: The Case for a Dividend Prudential Target*

Manuel Muñoz †

Working paper

No. 68

December 2018

* The views expressed in this paper are those of the author and do not necessarily reflect the views of the institutions he is affiliated to. I am in-debted to Javier Andrés and Luis A. Puch for invaluable support and guidance. I also thank, without implicating, Jorge Abad, Pablo Aguilar, María José Fernández, Jordi Galí, Samuel Hurtado, Laura Mayoral, Galo Nuño, Johannes Pfeifer, Dominik Thaler and Carlos Thomas for very helpful com-ments and suggestions, as well as participants in seminars at the Spanish Securities Exchange Commission (CNMV) and at Universidad Com-plutense de Madrid. I am responsible for all remaining errors.†Spanish Ministry for Economy and Business.

The views expressed in this paper are those of the author and do not necessarily represent the views of the

Spanish Ministry for Economy and Business, its Managers, or the CNMV.

The CNMV publishes this Working Paper Series to enhance research and contribute towards greater

knowledge of the stock markets and their regulation.

The CNMV distributes its reports and publications via the internet at www.cnmv.es

© CNMV. The contents of this publication may be reproduced, subject to attribution.

Layout & printing: Composiciones Rali, S.A.

Rethinking Capital Regulation: The Case for a Dividend Prudential Target 5

Abstract

The paper investigates the effectiveness of dividend-based macroprudential rules in complementing capital requirements to promote bank soundness and sustained lending over the cycle. First, some evidence on bank dividends and earnings in the euro area is presented. When shocks hit their profits, banks adjust retained earnings to smooth dividends. This generates bank equity and credit supply volatility. Then, a DSGE model with key financial frictions and a banking sector is developed to as-sess the virtues of what shall be called dividend prudential targets. Welfare-maxi-mizing dividend-based macroprudential rules are shown to have important proper-ties: (i) they are effective in smoothing the financial cycle by means of less volatile bank retained earnings, (ii) they induce welfare gains associated to a Basel III-type of capital regulation, (iii) they mainly operate through their cyclical component, en-suring that long-run dividend payouts remain unaffected, (iv) they are flexible enough so as to allow bank managers to optimally deviate from the target, and (v) they act as an insurance scheme for the real economy.

Keywords: macroprudential regulation, capital requirements, dividend prudential target, financial stability, bank dividends

JEL classification: E44, E61, G21, G28, G35

List of Contents

1 Introduction 11

2 Patterns of Bank Dividends in the Euro Area 15

3 The Basic Model 17

3.1 Main Features 17

3.2 Quantitative Exercise 26

4 Extended Model 31

4.1 Overview of the model 31

5 Quantitative Analysis 37

5.1 Calibration 37

5.2 Welfare Analysis 39

5.3 Robustness Checks 44

6 Conclusion 45

References 47

Appendix A. Data and Sources 63

Appendix B. Equations of the Extended Model 65

List of Tables

TABLE 1 Optimized rules and prudential losses; collateral shock (basic model) 51

TABLE 2 Baseline parameter values 52

TABLE 3 Steady state ratios 53

TABLE 4 Welfare gains 54

TABLE 5 Welfare gains and capital regulation 55

TABLE 6 Welfare gains and the CCyB 56

TABLE 7 Robustness checks 56

List of Figures

FIGURE 1 Bank dividends and earnings in the euro area. 2002:I – 2018:II 57

FIGURE 2 Impulse-responses to a negative collateral shock (basic model, baseline scenario) 58

FIGURE 3 Impulse-responses to a negative collateral shock (basic model, optimized prudential rules) 58

FIGURE 4 Welfare effects of ceteris paribus changes in ρd and ρx 59

FIGURE 5 Welfare effects of ceteris paribus changes in ρx (shutting down shocks one by one) 59

FIGURE 6 Welfare effects of ceteris paribus changes in γx and ρx + γx 60

FIGURE 7 Impulse-responses to a negative collateral shock (extended model, macroprudential policy scenarios) 60

FIGURE 8 Robustness checks: κ (welfare effects of ceteris paribus changes in ρx) 61

FIGURE 9 Robustness checks: x (welfare effects of ceteris paribus changes in ρx) 61

12 Comisión Nacional del Mercado de Valores


Figure 1: Bank dividends and earnings in the euro area. 2002:I – 2018:II

Note: (i) SX7E refers to the Euro Stoxx Banks Index. (ii) When applicable, the secondary y-axis corresponds to the dashed line. (iii) Data sources: Bloomberg, Eurostat, and own calculations.

-6

-4

-2

0

2

4

6

0

20

40

60

80

100

120

140

160

180

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

(a) SX7E Dividend payout ratio (percent)

Dividend Payout Ratio

Annual Real GDP Growth Rate

-20

-15

-10

-5

0

5

10

15

20

25

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

(b) SX7E Dividends and earnings (billion Euros)

Dividends

Earnings

0

20

40

60

80

100

120

140

160

-20

30

80

130

180

230

280

330

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

(c) SX7E Equity and retained earnings (million Euros)

Equity

Retained Earnings

rethinking capital regulation: the case for a dividend ...€¦ · rethinking capital regulation:...

Documents