Capital Ratios and the Weighted Average Cost of Capital: Evidence from Chilean Bank
25 Pages Posted: 17 Jun 2023
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
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