Evaluating Regulatory Reform: Banks’ Cost of Capital and Lending

73 Pages Posted: 20 Jun 2018 Last revised: 29 Jul 2020

See all articles by Anna Kovner

Anna Kovner

Federal Reserve Bank of New York

Peter Van Tassel

Federal Reserve Banks - Federal Reserve Bank of New York

Date Written: June 1, 2018

Abstract

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

Kovner, Anna and Van Tassel, Peter, Evaluating Regulatory Reform: Banks’ Cost of Capital and Lending (June 1, 2018). FRB of New York Staff Report No. 854, Available at SSRN: https://ssrn.com/abstract=3199941 or http://dx.doi.org/10.2139/ssrn.3199941

Anna Kovner (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Peter Van Tassel

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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