Working Paper

Supervisory Stringency, Payout Restrictions, and Bank Equity Prices

Abstract: I study investor responses to the 2020 bank stress tests that included restrictions on shareholder payouts. I find that banks subject to the stress tests and payout restrictions experienced both immediate and persistently lower excess stock price returns. In the cross-section, I find that excess stock returns declined with bank size but cannot otherwise be explained by pre-pandemic bank or payout characteristics, suggesting that investors penalized banks likely to experience greater regulatory scrutiny. However, the excess stock return penalties are smaller than those previously estimated in the literature examining voluntary payout reductions that signal bank distress. The results show that using supervisory discretion to take preventative actions during a crisis is less costly than waiting to take actions when banks are distressed.

Keywords: Bank payout policy; Stress testing; Bank supervision;

JEL Classification: G21; G28; G35;

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Bibliographic Information

Provider: Federal Reserve Bank of Kansas City

Part of Series: Research Working Paper

Publication Date: 2022-01-28

Number: RWP 22-01