Bank capital depletion through fair value accounting justified dividends evidence from south africa
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Bank Capital Depletion Through Fair Value Accounting Justified Dividends: Evidence From South Africa. Phillip de Jager. Introduction. Larry Summers – “was it the spark that started the forest fire or the timber dry condition of the forest”. Other studies. Anderson et al (2007) – S&P study

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Bank capital depletion through fair value accounting justified dividends evidence from south africa

Bank Capital Depletion Through Fair Value Accounting Justified Dividends: Evidence From South Africa

Phillip de Jager


Introduction

Introduction

Larry Summers – “was it the spark that started the forest fire or the timber dry condition of the forest”


Other studies

Other studies

  • Anderson et al (2007) – S&P study

  • Goncharov and Triest (2011) – Russian study. Exactly same research question

  • Letter by Martin Taylor – ex Barclays CEO


Mathematical model

Mathematical model

  • Capital ratio:

  • Increase in asset values:

  • Debt financed asset increase to restore initial CR: B =

  • Part of increase paid out:

    B =

  • Interaction between asset increase and payout: > 0

  • Asymmetry when loss


Implications of mathematical model

Implications of mathematical model

  • FVA and the increase of asset values increasing equity encourages expansion of asset base

  • Expansion is tempered by portion of increase distributed

  • Distribution implies that the shrinking of asset base required in downturn is exaggerated

  • Under HCA no need to expand asset base and no distribution of increase

  • Under HCA no immediate shrinking of asset base required in downturn as previous unbooked increase must 1st be eliminated


Research questions

Research questions


Q1 data

Q1: Data

Graphical representation of the total monthly bank net profit after tax in South Africa.


Q1 cointegrated profit and gdp

Q1: Cointegrated profit and GDP

Stationary residuals obtained by regressing NP on GDP.


Q1 m2m time series

Q1: M2M time-series

Time-series obtained by combining different mark-to-market and fair value entries; the difference between M2M1 and M2M2 is that for January 2001 – December 2007 M2M2 also include trading book mark-to-market entries.


Q1 profit regression

Q1: Profit regression


Q2 dividends

Q2: Dividends


Q2 dividends1

Q2: Dividends


Phillip de jager

Q2: Payoutratio

The percentage of total bank profit available for distribution paid out as a dividend


Financial statement evidence

Financial statement evidence

Firstrand 2011: “The total capital plan includes a dividend policy, which is set in order to ensure sustainable dividend cover based on sustainable normalised earnings. This also takes into account volatile earnings brought on by fair value accounting…”

Investec 2010: “Annual performance bonuses are closely linked to business performance, based on target business unit performance goals determined in the main by realised EVA profit performance…”


Conclusion

Conclusion

  • Find evidence that unrealised FVA profits increase bank net profit

  • Profit is the motivation for dividend levels over the period

  • In hindsight signify over payment of dividends


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