Capital Adequacy and Dividend Policy : Evidence from Italian Banks

The objective of the paper is to analyse capital adequacy, dividend policy and new share issues of Italian banks in the last twenty years, to identify the net role of the market in the capitalisation of Italian and European banks. The paper is primarily a descriptive study aimed at documenting the evolution of bank capital and capital adequacy of Italian banks in a comprehensive way. Particular attention is paid to dividend policy for two reasons: on the one hand, in hindsight, dividend policy may have played a role in weakening the capital base of larger listed banks and on the other hand, for the future, should the economic crisis continue, retained earnings could be the primary source of the high-quality capital that will presumably be required to comply with higher capital ratios that shall be imposed in the near future. Conclusions may be particularly significant considering that the Basel committee is proposing the introduction of an internationally agreed framework to promote capital conservation in the banking sector and a mechanism for rebuilding capital during economic recovery. The proposed mechanism is based on capital distribution constraints (i.e. no dividend payments) when capital levels fall under a buffer range above the minimum capital requirement