Bank capital, dividends and management compensation
Hyun Song Shin* Bank for International Settlements
2017 Biennial IADI Research Conference Basel, 1 June 2017
* The views expressed here are mine, not necessarily those of the Bank for International Settlements. Equity as foundation for lending
Annual changes in assets, equity and debt for a large European bank
1999–2015, in billions of euros Graph 3
300
y = 0.999x – 5.08 200 R2 = 0.999 100
0
–100 Debt (equity) change
–200 –100 –50 0 50 100 150 200 250 300 350 400 Asset change Debt change Equity change Scatter plot showing how much of the change in assets is accounted for by changes in debt and equity, respectively. Annual changes in billions of euros are shown for large European bank (1999-2015).
Sources: S&P Capital IQ; BIS calculations.
2 Bank capital as foundation for lending
Equity foundation of the building
Leverage height of the building
3 Sutyagin house
4 Sutyagin house
5 Sound banks lend more
Some stylised facts on bank leverage1 Figure 1
Cost of funding Non-equity funding Lending
y = 11.1 - 0.112x y = 2.46 + 0.0331x 6 2 y = 10.7 - 0.138x 2 R = 0.12 21 2 21 R = 0.16 R = 0.14 5 14 14 4 7 7 3
0 0 2 Growth of non-equity funding Growth of lending Cost of non-equity funding
1 –7 –7 10 20 30 40 50 60 70 10 20 30 40 50 60 70 10 20 30 40 50 60 70 Total assets/Equity Total assets/Equity Total assets/Equity 1 The panels represent scatter plots between the average level of leverage for a group of 105 international banks and selected bank-specific indicators: average cost of funding, average growth rate of non-equity financing; average annual growth rate of lending. Sources: BankScope; authors’ calculations.
Gambacorta and Shin (2016, JFI forthcoming)
6 Retained earnings and accumulated dividends for 90 euro area banks
Total retained earnings and accumulated dividends of a group of 90 euro area banks In billions of euros Graph 1
Euro area (total) By country, in 2015 60 0 15 0 53
223 30 196 177 40 0 10 0 110 155 37 87 140 50 28 78 20 0 32 50 30 279 190 234 301 227 250 296 310 348 92 38 109 37 47 25 0 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 DE ES FR IT NL Other EA 1 Retained earning s Cumulative dividends from 2007
DE = Germany; ES = Spain; FR = France; IT = Italy; NL = Netherlands; Other EA = Other euro area. 1 Austria, Belgium, Finland, Greece, Ireland and Portugal.
Sources: S&P Capital IQ; BIS calculations.
7 Two questions to ponder
Who is the principal in the principal-agent relationship?
Who are the interested parties?
8 Stickiness of CEO compensation and dividends