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Evaluating regulatory reform: banks’ cost of capital and lending

Anna Kovner and Peter Van Tassel ()

No 854, Staff Reports from Federal Reserve Bank of New York

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 (search for similar items in EconPapers)
JEL-codes: G12 G21 G28 (search for similar items in EconPapers)
Pages: 73
Date: 2018-06-01
New Economics Papers: this item is included in nep-ban and nep-cba
Note: Revised July 2020. Previous title: “Regulatory Changes and the Cost of Capital for Banks”
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Handle: RePEc:fip:fednsr:854