The Cost of Equity for Global Banks: A CAPM Perspective from 1990 to 2009

15 Pages Posted: 3 Aug 2012 Last revised: 29 Sep 2013

Date Written: September 1, 2009


This article provides estimates of the inflation-adjusted cost of equity for banks in six countries over the period 1990-2009. This cost is estimated using the single-factor capital asset pricing model (CAPM), where expected stock returns are a function of risk-free rates and a bank-specific risk premium. Cost of equity estimates declined steadily across all countries from 1990 to 2005 but then rose from 2006 onwards. The fall in the cost of equity reflects (i) the decrease in risk-free rates over this period, and (ii) a decline in the sensitivity of bank stock returns to market risk (the CAPM beta) in all countries except Japan. The estimates show wide variation across banks, highlighting the difficulty of estimating expected returns using the CAPM.

Keywords: Cost of equity, banks, capital asset pricing model, financial crisis

JEL Classification: G12, G21, G32

Suggested Citation

King, Michael Robert, The Cost of Equity for Global Banks: A CAPM Perspective from 1990 to 2009 (September 1, 2009). BIS Quarterly Review, September 2009, Available at SSRN:

Michael Robert King (Contact Author)

Gustavson School Of Business ( email )

University of Victoria
Business & Economics Building, Room 246
Victoria, British Columbia V8W 2Y2
250-721-6425 (Phone)

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