Regulatory Changes and the Cost of Capital for Banks - FEDERAL RESERVE BANK of NEW YORK

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Evaluating Regulatory Reform: Banks’ Cost of Capital and Lending

Previous title: “Regulatory Changes and the Cost of Capital for Banks”

Number 854
June 2018 Revised July 2020

JEL classification: G12, G21, G28

Authors: Anna Kovner and Peter Van Tassel

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.

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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.

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