Low price-to-book ratios and bank dividend payouts: economic policy implications

Abstract

Banks with a low price-to-book ratio have a greater propensity to pay out dividends. This propensity is especially marked for banks with a price-to-book ratio below a threshold of 0.7, a situation that characterises many banks in recent years, especially in the euro area. We demonstrate these features using data for 271 advanced economy banks in 29 jurisdictions. Dividend payouts as a proportion of profits rise in a non-linear way as the price-to-book ratio falls below 0.7. In a hypothetical exercise with fixed balance sheet ratios, we find that a suspension of bank dividends in 2020 during the Covid-19 pandemic would have added, under different stress scenarios and parametrisations, an additional US$0.2–1.1 trillion of bank lending capacity in our sample, equivalent to 0.3–1.6% of total GDP.