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Phillip de Jager

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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Phillip de Jager

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  1. Bank Capital Depletion Through Fair Value Accounting Justified Dividends: Evidence From South Africa Phillip de Jager

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

  3. 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

  4. 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

  5. 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

  6. Research questions

  7. Q1: Data Graphical representation of the total monthly bank net profit after tax in South Africa.

  8. Q1: Cointegrated profit and GDP Stationary residuals obtained by regressing NP on GDP.

  9. 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.

  10. Q1: Profit regression

  11. Q2: Dividends

  12. Q2: Dividends

  13. Q2: Payoutratio The percentage of total bank profit available for distribution paid out as a dividend

  14. 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…”

  15. 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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