WORKING PAPER SERIES
Proving Approval: Bank Dividends,
Regulation, and Runs
Previously circulated as “Proving Approval: Dividend Regulation and Capital Payout Incentives.”
Levent Güntay
Federal Deposit Insurance Corporation
Stefan Jacewitz
Federal Deposit Insurance Corporation
Jonathan Pogach
Federal Deposit Insurance Corporation
Previous Version: November 2015
Current Version: August 2017
Forthcoming as “A Prudential Paradox: The Signal in (not) Restricting Bank Dividends”
in Journal of Money, Credit and Banking.
FDIC CFR WP 2015-05
fdic.gov/cfr
The Center for Financial Research (CFR) Working Paper Series allows CFR staff and their coauthors to circulate
preliminary research findings to stimulate discussion and critical comment. Views and opinions expressed in CFR Working
Papers reflect those of the authors and do not necessarily reflect those of the FDIC or the United States. Comments and
suggestions are welcome and should be directed to the authors. References should cite this research as a “FDIC CFR
Working Paper” and should note that findings and conclusions in working papers may be preliminary and subject to
revision.
Proving Approval: Bank Dividends,
Regulation, and Runs
Previously circulated as “Proving Approval: Dividend Regulation and Capital Payout Incentives.”
Levent Güntay
Federal Deposit Insurance Corporation
Stefan Jacewitz
Federal Deposit Insurance Corporation
Jonathan Pogach
Federal Deposit Insurance Corporation
Previous Version: November 2015
Current Version: August 2017
Forthcoming as “A Prudential Paradox: The Signal in (not) Restricting Bank Dividends”
in Journal of Money, Credit and Banking.
FDIC CFR WP 2015-05
fdic.gov/cfr
The Center for Financial Research (CFR) Working Paper Series allows CFR staff and their coauthors to circulate
preliminary research findings to stimulate discussion and critical comment. Views and opinions expressed in CFR Working
Papers reflect those of the authors and do not necessarily reflect those of the FDIC or the United States. Comments and
suggestions are welcome and should be directed to the authors. References should cite this research as a “FDIC CFR
Working Paper” and should note that findings and conclusions in working papers may be preliminary and subject to
revision.
Proving Approval: Bank Dividends, Regulation, and
Runs∗
Levent G ̈untay† Stefan Jacewitz† Jonathan Pogach†
August 29, 2017
Abstract
Bank stability depends on information. Regulators can allow banks to release some
information about their safety and soundness. This paper shows how dividend regulation
and information interact to affect bank stability. In the model, wealth-expropriation,
excess cash flow, and signaling incentives affect a bank’s decision to pay dividends.
The regulator aims to prevent wealth expropriation through dividend restrictions on
undercapitalized banks. However, this action increases the banks’ incentives to pay
dividends for signaling. Signaling incentives are further exacerbated in the presence
of bank runs. We show that the first best solution is achievable through dividend
restrictions only if capital requirements are sufficiently high. Furthermore, a more
restrictive dividend regulatory policy is optimal in stressed economic environments,
when banks are more run-prone, allowing the weak banks to pool with strong.
Keywords: Dividends, Banking, Capital Regulation, Wealth-Expropriation, Signaling, Bank
runs
NOTE: The analysis, conclusions, and opinions set forth here are those of the author(s) alone
and do not necessarily reflect the views of the Federal Deposit Insurance Corporation.
∗We thank Michal Kowalik, Celine Meslier, George Pennacchi, Manju Puri, Carlos Ramirez, Haluk Unal,
and participants of seminars or workshops at American University, the FDIC, the FDIC-JFSR 13th Annual
Banking Research Conference, the Federal Reserve Board of Governors, the Financial Intermediation Research
Society (FIRS) Conference 2016, and the Financial Management Association.
†G ̈untay is at the MEF University, Turkey and Jacewitz and Pogach are at the Federal Deposit In-
surance Corporation, US. The authors may be contacted at guntayl@mef.edu.tr, sjacewitz@fdic.gov, and
jpogach@fdic.gov, respectively.
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Runs∗
Levent G ̈untay† Stefan Jacewitz† Jonathan Pogach†
August 29, 2017
Abstract
Bank stability depends on information. Regulators can allow banks to release some
information about their safety and soundness. This paper shows how dividend regulation
and information interact to affect bank stability. In the model, wealth-expropriation,
excess cash flow, and signaling incentives affect a bank’s decision to pay dividends.
The regulator aims to prevent wealth expropriation through dividend restrictions on
undercapitalized banks. However, this action increases the banks’ incentives to pay
dividends for signaling. Signaling incentives are further exacerbated in the presence
of bank runs. We show that the first best solution is achievable through dividend
restrictions only if capital requirements are sufficiently high. Furthermore, a more
restrictive dividend regulatory policy is optimal in stressed economic environments,
when banks are more run-prone, allowing the weak banks to pool with strong.
Keywords: Dividends, Banking, Capital Regulation, Wealth-Expropriation, Signaling, Bank
runs
NOTE: The analysis, conclusions, and opinions set forth here are those of the author(s) alone
and do not necessarily reflect the views of the Federal Deposit Insurance Corporation.
∗We thank Michal Kowalik, Celine Meslier, George Pennacchi, Manju Puri, Carlos Ramirez, Haluk Unal,
and participants of seminars or workshops at American University, the FDIC, the FDIC-JFSR 13th Annual
Banking Research Conference, the Federal Reserve Board of Governors, the Financial Intermediation Research
Society (FIRS) Conference 2016, and the Financial Management Association.
†G ̈untay is at the MEF University, Turkey and Jacewitz and Pogach are at the Federal Deposit In-
surance Corporation, US. The authors may be contacted at guntayl@mef.edu.tr, sjacewitz@fdic.gov, and
jpogach@fdic.gov, respectively.
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