Bank leverage, capital requirements and the implied cost of (equity) capital


Schmidt, Christian



URL: https://www.paris-december.eu/conference/paris-dec...
Additional URL: https://www.paris-december.eu/sites/default/files/...
Document Type: Conference or workshop publication
Year of publication: 2019
Book title: 17th Paris December Finance Meeting 2019
Page range: 1-65
Conference title: 17th Paris December Finance Meeting 2019
Location of the conference venue: Paris, France
Date of the conference: 19.12.2019
Place of publication: Paris
Publishing house: EUROFIDAI (European Financial Data Institute)
Publication language: English
Institution: Außerfakultäre Einrichtungen > Institut für Versicherungswissenschaft
Business School > ABWL, Risikotheorie, Portfolio Management u. Versicherungswissenschaft (Albrecht)
Subject: 330 Economics
Classification: JEL: C33, G21, G28, G32,
Individual keywords (German): Verschuldung von Banken , Implizite Kapitalkosten , Bank Regulation , Modigliani-Miller
Keywords (English): Bank Leverage , Implied Cost of Capital , EBA Capital Exercise , Capital Requirements , Bank Regulation
Abstract: Do heightened capital requirements impose private costs on banks by adversely affecting their cost of capital? And if so, does the effect differ across different groups of banks? Using an international sample of listed banks over the period from 1990 to 2017, I find that equity investors adjust their expected return weakly in accordance with the Modigliani and Miller (1958) Theorem when banks decrease their leverage. The adjustment is stronger for smaller banks, banks that rely more on deposit financing and when debt is reduced rather than deposits, which never triggers a statistically significant adjustment. In any cases, the adjustment is not strong enough to keep banks' cost of capital constant which is estimated to increase by 10 to 40bps, representing a relative increase of 2.8% to 12.6%, when shifting equity from 8% to 16%. When using the 2011 EBA capital exercise as a quasi-natural experiment to identify the impact of capital regulation on bank's cost of capital, results indicate a strong reduction in required returns for the treated banks. However, the reduction is mainly caused by shifts in asset risk, highlighting the importance of differentiating between short-run and long-run effects.
Additional information: Online-Ressource

Dieser Eintrag ist Teil der Universitätsbibliographie.




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Schmidt, Christian Bank leverage, capital requirements and the implied cost of (equity) capital. 1-65 In: 17th Paris December Finance Meeting 2019 (2019) Paris 17th Paris December Finance Meeting 2019 (Paris, France) [Conference or workshop publication]


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