Staff Reports
Regulatory Changes and the Cost of Capital for Banks
Number 854
June 2018 Revised September 2018

JEL classification: G12, G21, G28

Authors: Anna Kovner and Peter Van Tassel

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. We also find some evidence that stress testing has lowered the cost of capital for the largest stress-tested banks. Changes to banks’ cost of capital have real consequences—we find that increases in banks’ cost of capital are associated with tightening in credit supply.

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AUTHOR DISCLOSURE STATEMENT(S)
Anna Kovner
The author, Anna Kovner, declares that she has no relevant or material financial interests that relate to the research described in this paper.

Peter Van Tassel
I, Peter Van Tassel, have no relevant or material financial interests that relate to the research described in this paper.