NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Nirupama Kulkarni

Research Director
CAFRAL, Research Department
Reserve Bank of India Main Building,
Mezzanine Floor,
Shahid Bhagat Singh Road,
Fort, Mumbai 400 001

E-Mail: nirupama.cafral@rbi.org.in

NBER Working Papers and Publications

March 2011Dividends and Bank Capital in the Financial Crisis of 2007-2009
with Viral V. Acharya, Irvind Gujral, 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...
 
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