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Evaluating the impact of dividend restrictions on euro area bank valuations
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Evaluating the impact of dividend restrictions on euro area bank valuations

Author

Listed:
  • Andreeva, Desislava
  • Bochmann, Paul
  • Mosthaf, Jonas
  • Schneider, Julius

Abstract

This article evaluates the impact on euro area bank valuations of the March 2020 European Central Bank (ECB) recommendation not to pay dividends or buy back shares. The analysis provides evidence of a negative impact on bank valuations in the order of magnitude of 7%. That impact is not, however, homogenous across banks: institutions that pay out dividends but fail to generate returns commensurate with investor requirements are found to be more strongly affected than those generating shareholder value or banks that are too weak to pay out dividends even in the absence of dividend restrictions. Further, the analysis suggests that uncertainty over future distributions arising from the SSM recommendation, rather than the suspension of dividends per se, explains most of the negative impact on bank valuations. By construction, this analysis captures the side effects of the measure, notwithstanding its overall merit in preserving bank capital and sustaining bank intermediation capacity during the COVID-19 period. JEL Classification: G21, G28, C31

Suggested Citation

  • Andreeva, Desislava & Bochmann, Paul & Mosthaf, Jonas & Schneider, Julius, 2021. "Evaluating the impact of dividend restrictions on euro area bank valuations," Macroprudential Bulletin, European Central Bank, vol. 13.
    • Handle: RePEc:ecb:ecbmbu:2021:0013:3
    Note: 2285252
    as

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    Citations

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    Cited by:

    1. Dautović, Ernest & Gambacorta, Leonardo & Reghezza, Alessio, 2023. "Supervisory policy stimulus: evidence from the euro area dividend recommendation," Working Paper Series 2796, European Central Bank.
    2. Irene Pablos & Carlos Pérez Montes, 2022. "Impact of payout restrictions in the wake of the COVID-19 pandemic on European and US banks´ market valuation," Financial Stability Review, Banco de España, issue Autumn.
    3. Marsh, W. Blake, 2023. "Supervisory stringency, payout restrictions, and bank equity prices," Journal of Banking & Finance, Elsevier, vol. 154(C).
    4. Irene Pablos & Carlos Pérez Montes, 2022. "Impact of payout restrictions in the wake of the COVID-19 pandemic on European and US banks´ market valuation," Financial Stability Review, Banco de España, issue Autumn.

    More about this item

    Keywords

    bank valuations; Dividend restrictions; financial regulation;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models

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