Report

Evaluating regulatory reform: banks’ cost of capital and lending

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;

Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2018-06-01

Number: 854

Note: Revised July 2020. Previous title: “Regulatory Changes and the Cost of Capital for Banks”