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Federal Reserve Bank of New York
Staff Reports
Regulatory changes and the cost of capital for banks
Anna Kovner
Peter Van Tassel
Abstract

We estimate the cost of capital for the banking industry and find that while the cost of capital soared for banks in the financial crisis, after the passage of the Dodd-Frank Act, the value-weighted cost of capital for banks fell differentially more than did the cost of capital for nonbanks. The very largest banks drive the decline in expected returns. Over a longer time horizon, the cost of capital for banks may be differentially higher than that for nonbanks relative to the time period before the Graham-Leach-Bliley Act was passed, although in some measures the difference is negative and/or cannot be distinguished from zero. We find some evidence that stress testing has lowered the cost of capital for the largest stress-tested banks, although not for those added more recently to stress testing.


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Anna Kovner & Peter Van Tassel, Regulatory changes and the cost of capital for banks, Federal Reserve Bank of New York, Staff Reports 854, 01 Jun 2018.
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Keywords: cost of capital; beta; bank regulation; Dodd-Frank; banks
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