The Shadow Cost of Bank Capital Requirements

Review of Financial Studies, Forthcoming

53 Pages Posted: 19 Jun 2013 Last revised: 24 Feb 2016

Roni Kisin

Visiting Wharton School, University of Pennsylvania

Asaf Manela

Washington University in St. Louis - John M. Olin Business School

Date Written: February 21, 2016

Abstract

We estimate the shadow cost of capital requirements using data on a costly loophole that allowed banks to relax these constraints. This loophole — liquidity guarantees to asset-backed commercial paper conduits — was exploited by the largest banks before the crisis of 2008. We show theoretically that a bank's use of the loophole reveals its private compliance cost, which takes into account both the costs of issuing equity and the effectiveness of capital regulation. We find that increasing capital requirements would impose a modest cost — $220 million a year for all participating banks combined per 1pp increase, and $14 million on average.

Keywords: Financial intermediation, Bank capital requirements, Cost of capital regulation, Leverage, Regulatory Arbitrage, Loophole

JEL Classification: G21, G28, G18, L51, G32

Suggested Citation

Kisin, Roni and Manela, Asaf, The Shadow Cost of Bank Capital Requirements (February 21, 2016). Review of Financial Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2280453 or http://dx.doi.org/10.2139/ssrn.2280453

Roni Kisin (Contact Author)

Visiting Wharton School, University of Pennsylvania ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
2158981588 (Phone)

HOME PAGE: http://https://sites.google.com/site/ronikisinresearch/

Asaf Manela

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-9178 (Phone)

HOME PAGE: http://apps.olin.wustl.edu/faculty/manela

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