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

Abstract

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