The Interplay between Payout Policies and Debt Inside Banking Firms

The paper asks whether there is an important interplay between the payout policies and the leverage structures of financial firms. We analyze a sample of United States commercial banks, and find a significant interaction between dividends and leverage after fall 2008. Banks are more likely to pay dividends and also tend to pay out larger shares of the available resources when they raise their non-deposit leverage. Conversely, firms have more restrictive dividend policies when they increase in deposit leverage. We interpret this result arguing that, by receiving high dividends banks' owners can shift some of their risk towards the non-deposit creditors. Deposit creditors instead, can withdraw their funds upon demand, and they seem to contain the risk-shifting of dividends. The crisis of 2007-2008 appears having accentuated this behavior. Banks were facing severe credit freezes and liquidity constraints, hence didn't want to expropriate their depositors from the dividend value. We do not observe a significant interplay between leverage and the payout associated to banks´ share repurchases.