London Business School
London NW1 4SA
Institutional Affiliation: London Business School
NBER Working Papers and Publications
|March 2011||Dividends and Bank Capital in the Financial Crisis of 2007-2009|
with Viral V. Acharya, Nirupama Kulkarni, Hyun Song Shin: w16896
The headline numbers appear to show that even as banks and financial intermediaries suffered large credit losses in the financial crisis of 2007-09, they raised substantial amounts of new capital, both from private investors and through government-funded capital injections. However, on closer inspection the composition of bank capital shifted radically from one based on common equity to that based on debt-like hybrid claims such as preferred equity and subordinated debt. The erosion of common equity was exacerbated by large scale payments of dividends, in spite of widely anticipated credit losses. Dividend payments represent a transfer from creditors (and potentially taxpayers) to equity holders in violation of the priority of debt over equity. The dwindling pool of common equity in the ba...