Authors: Fulvia Fringuellotti and Thomas Kroen
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Staff Reports
Payout Restrictions and Bank Risk-Shifting
Number 1123
September 2024
September 2024
JEL classification: G21, G28, G35, G38
What are the effects of payout restrictions on bank risk-shifting? To answer this question, we exploit the restriction policies imposed during the Covid-crisis on US banks as a natural experiment. Using a high-frequency differences-in-differences empirical strategy, we show that, when share buybacks are banned and dividends restricted, banks’ equity prices fall while their CDS spreads and bond yields decline. These results indicate that payout restrictions shift risk from debtholders into equityholders. Consistent with a risk-shifting channel, we find that these effects revert once restrictions are lifted. Moreover, banks that are ex-ante more reliant on share buybacks than dividends in their payout policies, decrease risk-taking relative to banks that are ex ante more dividends reliant, with those effects reverting when the restrictions are relaxed. These results indicate that payout and risk-taking choices are complementary and that regulatory payout restrictions endogenously affect bank risk-shifting incentives.
Author Disclosure Statement(s)
Fulvia Fringuellotti
Fulvia Fringuellotti declares that she has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Thomas Kroen
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Fulvia Fringuellotti declares that she has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Thomas Kroen
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Suggested Citation:
Fringuellotti, Fulvia, and Thomas Kroen. 2024. “Payout Restrictions and Bank Risk-Shifting.” Federal Reserve Bank of New York Staff Reports, no. 1123, September. https://doi.org/10.59576/sr.1123
Fringuellotti, Fulvia, and Thomas Kroen. 2024. “Payout Restrictions and Bank Risk-Shifting.” Federal Reserve Bank of New York Staff Reports, no. 1123, September. https://doi.org/10.59576/sr.1123
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