Capital Ratios and the Weighted Average Cost of Capital: Evidence from Chilean Bank

25 Pages Posted: 17 Jun 2023

See all articles by Alejandro Jara

Alejandro Jara

Central Bank of Chile

Rodrigo Cifuentes

affiliation not provided to SSRN

Tomás Gómez

Inter-American Development Bank (IDB)

Abstract

In this paper, we find that one additional percentage point of common equity to risk-weighted assets ratio is associated with an increase in the Weighted Average Cost of Capital of Chilean banks by a maximum of only 11.7 bsp. This result is found by following alternative empirical strategies, which consider both market data and banks’ balance sheet information. We find that higher capital ratios decrease the return on banks’ capital in magnitudes similar to those found in the literature. Also, we find a strong impact of capital ratios on the return of subordinated debt, and no effect on senior debt.

Keywords: Regulatory Policies, capital requirements, Subordinated debt, Basel III

Suggested Citation

Jara, Alejandro and Cifuentes, Rodrigo and Gómez, Tomás, Capital Ratios and the Weighted Average Cost of Capital: Evidence from Chilean Bank. Available at SSRN: https://ssrn.com/abstract=4482815 or http://dx.doi.org/10.2139/ssrn.4482815

Alejandro Jara (Contact Author)

Central Bank of Chile ( email )

Chile

Rodrigo Cifuentes

affiliation not provided to SSRN ( email )

No Address Available

Tomás Gómez

Inter-American Development Bank (IDB)

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