An analysis of the potential impact of heightened capital requirements on banks’ cost of capital

Tomas Mantecon (), Adel Almomen (), He Ren () and Yi Zheng ()
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Tomas Mantecon: University of North Texas
Adel Almomen: Prince Sultan University
He Ren: Texas Woman’s University
Yi Zheng: State University of New York at New Paltz

Journal of Financial Services Research, 2023, vol. 64, issue 3, No 2, 325-368

Abstract: Abstract We provide new estimates of the association between the level of capital and the cost of capital for US banks by using the implied cost of capital as a measure of the cost of equity and by factoring in the effect of the cost of debt. With the important exception of the largest banks, we find that the cost of equity declines when the level of capital increases. This negative association is stronger after the onset of the 2007–2008 financial crisis. Banks’ cost of debt also declines when the level of capital increases. However, the weighted average cost of capital (WACC) remains unaltered when capital increases. The analysis of a sample of large banks yields different results: there is no discernible association between the level of capital and the costs of equity and debt for large banks, and their WACC increases with the level of capital.

Keywords: Bank capital; Cost of capital; Implied cost of capital; Bank regulation (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s10693-023-00400-y

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