Basel III is a regulatory framework that aims to increase resilience in the banking system by strengthening banks’ capital requirements, reducing market liquidity risk, and improving the ability of banks to weather sustained periods of market stress. The objective of Basel III capital proposal is to make banks safe and sound. Banks are in the implementation process of the new requirements, with an end date of 2019 for most banks, although some are set to complete their application before this date. The impact of Basel III is not restricted to banks. However, this study focuses on the effect of changes in US commercial banks’ capital requirements
This paper investigates the effects of new capital requirements of Basel III on dividend policy in US commercial bank. We conduct a dataset of the annual report from the Uniform Bank Performance Report (UBPR) provide by the Federal Financial Institutions Examination Council (FFIEC) and the structure and geographical variables are from the Federal Reserve Bank of Chicago. The examination periods are from 2011 to 2015 which are the periods after the announcement of the capital proposal of Basel III.
The main findings document a negative relation between new capital requirements of Basel III and dividend; these results suggest that G-SIBs & D-SIBs pay much lower dividend relative to common equity when they are preparing to complete the implementation of Basel III. However, when they are ready for the change of the minimum capital requirement, they start to pay out more as the dividends as previously.
Thus, this study support that G-SIBs & D-SIBs plow back earnings to recapitalize themselves due to the higher capital requirement of Basel III. So, shareholders could be
not so worried about the lower dividend payout because it just temporarily.
Further, the impact of Basel III is strongly dependent on its future implementation.
The increase in the capital requirement on regulation will ultimately make banks become a safety and soundness. Even if the performance of the economy is slow, the stability of bank system will be able to sustain the confidence level of investor. It is undeniable that the implementation of Basel III will increase transparency, growth and financial strength of the banks. Eventually, it will lead to banks’ profitability and stability over the years.
In conclusion, these results are valuable for regulators, bank managers, shareholders and investors. In the short term, the banks are likely to retain profits by the reducing dividend payout to meet the regulatory capital requirement. In the long run, the banks will become more safety and soundness. Banks will face an environment with lower returns on capital and slower growth. By reducing leverage and imposing capital requirements, it reduces banks' earning power in good economic times.
Nevertheless, it makes banks safer and better able to survive and thrive under financial stress. Bank managers can be restored the dividend and capital repurchase programs over time, particularly in the best-capitalized banks. For bank investors, this decreases appetite to investment for banking sector due to lower return, but it also increases confidence in the strength and stability of banks' balance sheets.Finally, the advantages far outweigh the disadvantages in the implementation of Basel III.
Reference
Abreu, J. F., & Gulamhussen, M. A. (2013). Dividend payouts: Evidence from U.S.
bank holding companies in the context of the financial crisis. Journal of Corporate Finance, 22, 54-65.
Abreu, M., & Mendes, V. (2001, May). Commercial bank interest margins and profitability: Evidence for some EU countries. Paper presented at Pan-European Conference Jointly Organised by the IEFS-UK & University of Macedonia Economic & Social Sciences. 17-20
Admati, A. R., & Pfleiderer, P. C. (2010). Increased-liability equity: A proposal to improve capital regulation of large financial institutions. Stanford University Graduate School of Business Research Paper No. 2043; Rock Center for Corporate Governance at Stanford University Working Paper No. 68. Available at SSRN:
http://ssrn.com/abstract=1532484 or http://dx.doi.org/10.2139/ssrn.1532484 Allen, B., Chan, K. K., Milne, A., & Thomas, S. (2012). Basel III: Is the cure worse
than the disease? International Review of Financial Analysis, 25, 159-166.
Allen, F., & Michaely, R. (2003). Chapter 7 - Payout Policy. In M. H. George M.
Constantinides & M. S. René (Eds.), Handbook of the Economics of Finance, 1, 337-42.
Al‐Twaijry, A. A. (2007). Dividend policy and payout ratio: Evidence from the Kuala Lumpur stock exchange. The Journal of Risk Finance, 8(4), 349-363.
Baker, H. K., & Powell, G. E. (2000). Determinants of corporate dividend policy: A survey of NYSE firms. Financial Practice and Education,10, 29–40.
Baker, H.K., Powell, G.E., & Veit, E. T. (2002). Revisiting managerial perspectives on dividend policy. Journal of Economics and Finance, 26(3), 267-283
Basse, T., Reddemann, S., Riegler, J.-J., & von der Schulenburg, J. M. G. (2014). Bank dividend policy and the global financial crisis: Empirical evidence from Europe.
European Journal of Political Economy, 34, S25-S31.
Basel Committee on Banking Supervision (BCBS) (2010a). An assessment of the long-term economic impact of stronger capital and liquidity requirements. Bank for International Settlements.
Basel Committee on Banking Supervision (BCBS) (2010b). Basel III: A global regulatory framework for more resilient banks and banking systems. Bank for International Settlements.
Basel Committee on Banking Supervision (BCBS) (2014). The G-SIB assessment methodology – score calculation. Bank for International Settlements.
Bertrand, M., Duflo, E., & Mullainathan, S. (2004). How much should we trust differences-in-differences estimates? The Quarterly Journal of Economics, 119(1), 249-275.
Bessler, W., & Nohel, T. (1996). The stock-market reaction to dividend cuts and omissions by commercial banks. Journal of Banking & Finance, 20(9), 1485-1508.
Boldin, R., & Leggett, K. (1995). Bank dividend policy as a signal of bank quality.
Financial Services Review, 4(1), 1-8.
Brav, A., Graham, J. R., Harvey, C. R., & Michaely, R. (2005). Payout policy in the 21st century. Journal of Financial Economics, 77(3), 483-527.
Brockman, P., & Unlu, E. (2009). Dividend policy, creditor rights, and the agency costs of debt. Journal of Financial Economics, 92(2, (5)), 276-299.
Collins, M. C., Blackwell, D. W., & Sinkey, J. F. (1994). Financial innovation, investment opportunities, and corporate policy choices for large bank holding companies. Financial Review, 29(2), 223-247.
Cosimano, T. F., & Hakura, D. S. (2011). Bank behavior in response to Basel III: A cross-country analysis. International Monetary Fund, Working Paper WP/11/119.
Dickens, R. N., Casey, K. M., & Newman, J. A. (2002). Bank dividend policy:
Explanatory factors. Quarterly Journal of Business and Economics, 41(1/2), 3-12.
Damodaran, A. (2015). Applied corporate finance. Hoboken, NJ John Wiley & Sons Fama, E. F., & French, K. R. (2001). Disappearing dividends: Changing firm
characteristics or lower propensity to pay? Journal of Financial Economics, 60(1), 3-43.
Filbeck, G., & Mullineaux, D. J. (1999). Agency costs and dividend payments: The case of bank holding companies. The Quarterly Review of Economics and Finance, 39(3), 409-418.
Francis, B. B., Hasan, I., John, K., & Song, L. (2011). Corporate governance and dividend payout policy: A test using antitakeover legislation. Financial Management, 40(1), 83-112.
Goddard, J. A., Molyneux, P., & Wilson, J. O. S. (2004). The profitability of European banks: A cross-sectional and dynamic panel analysis. Manchester School, 72(3), 363-381.
Goulding, K. (2011). Differences-in-differences estimation in R and Stata. Retrieved June 24, 2016, from https://thetarzan.wordpress.com/2011/06/20/differences-in-differences-estimation-in-r-and-stata
Grullon, G., Michaely, R., Benartzi, S., & Thaler, R. H. (2005). Dividend Changes Do Not Signal Changes in Future Profitability. The Journal of Business, 78(5), 1659-1682.
Hyun, J.S., & Rhee, B.K. (2011). Bank capital regulation and credit supply. Journal of Banking & Finance, 35(2), 323-330.
Leary, M. T., & Michaely, R. (2011). Determinants of dividend smoothing: Empirical evidence. Review of Financial Studies, 24(10), 3197-3249.
Miller, M. H., & Modigliani, F. (1961). Dividend policy, growth, and the valuation of shares. The Journal of Business, 34(4), 411-433.
PricewaterhouseCoopers (2010, Octorber). The new Basel III framework: Navigating changes in bank capital management. Pricewaterhouse Coopers LLP.
Schwerter, S. (2011). Basel III's ability to mitigate systemic risk. Journal of financial regulation and compliance, 19(4), 337-354.
Staikouras, C. K., & Wood, G. E. (2011). The determinants of European bank profitability. International Business & Economics Research Journal (IBER), 3(6), 57-68.
Subbarao D. (2012, October). Basel III in international and Indian contexts: Ten questions we should know the answers for. RBI Monthly Bulletin, 1809-1817.
Theis, J., & Dutta, A. S. (2009). Explanatory factors of bank dividend policy: Revisited.
Managerial Finance, 35(6), 501-508.
Yan, M., Hall, M. J. B., & Turner, P. (2012). A cost–benefit analysis of Basel III: Some evidence from the UK. International Review of Financial Analysis, 25, 73-82.