Macroprudential policy with capital buffers

Financial regulation imposes equity buffers on banks by restricting dividends. This paper studies constrained-efficient dividend policy when fund loans with and debt. In the model, bank shareholders consider costly a bank’s access to debt depends its shareholder value. response loan losses cut dividends, but eventually defer dividends too much. They do not internalize that commitment higher (and fewer loans) during recoveries from financial crises would increase value crises. Constrained-efficient while restricted normal times zero crises, are recoveries.