Evaluating Regulatory Reform: Banks’ Cost of Capital and Lending
73 Pages Posted: 20 Jun 2018 Last revised: 29 Jul 2020
Date Written: June 1, 2018
We examine the eﬀects of regulatory changes on banks’ cost of capital and lending. Since the passage of the Dodd-Frank Act, the value-weighted CAPM cost of capital for banks has averaged 10.5 percent and declined by more than 4 percent on a within-ﬁrm basis relative to ﬁnancial crisis highs. This decrease was much greater for the largest banks subject to new regulation than for other banks and ﬁrms. Over a longer twenty-year horizon, we ﬁnd that changes in the systematic risk of bank equity have real economic consequences: increases in banks’ cost of capital are associated with tightening in credit supply and loan rates.
Keywords: cost of capital, beta, bank regulation, Dodd-Frank Act, banks
JEL Classification: G12, G21, G28
Suggested Citation: Suggested Citation