Testing the Impact of Higher Capital Requirements on Unlisted German Banks for a Short-Term Investment Period

Abstract

Higher capital requirements of Basel III are criticized for increasing the cost of capital for banks. Against this backdrop, Admati et al. (2013) argue that higher equity ratios are not expensive because the required return on equity will decrease. Previous studies have empirically tested this argument but focused only on listed banks. We expand the debate with the examination of 78 unlisted banks in Germany. The empirical model of Miles et al. (2012) is applied to test the impact of higher capital requirements on the cost of capital. We find that bank’s funding costs increase insignificantly for unlisted German banks.

Keywords: Bank Capital Requirements, Capital Structure, Cost of Capital, Modigliani/Miller, WACC

JEL Classification: G21, G28, G32