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The Shadow Cost of Bank Capital Requirements

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  • Roni Kisin
  • Asaf Manela

Abstract

We estimate the shadow cost of capital requirements using data on a costly loophole that allowed banks to relax these constraints. This loophole—liquidity guarantees to asset-backed commercial paper conduits—was exploited by the largest banks before the crisis of 2008. We show theoretically that a bank's use of the loophole reveals its private compliance cost, which takes into account both the costs of issuing equity and the effectiveness of capital regulation. We find that increasing capital requirements would impose a modest cost—$220 million a year for all participating banks combined per one-percentage-point increase, and $14 million on average. Received June 5, 2015; accepted February 23, 2016 by Editor Philip Strahan.

Suggested Citation

  • Roni Kisin & Asaf Manela, 2016. "The Shadow Cost of Bank Capital Requirements," Review of Financial Studies, Society for Financial Studies, vol. 29(7), pages 1780-1820.
  • Handle: RePEc:oup:rfinst:v:29:y:2016:i:7:p:1780-1820.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhw022
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    Cited by:

    1. Gropp, Reint & Mosk, Thomas & Ongena, Steven & Wix, Carlo, 2016. "Bank response to higher capital requirements: Evidence from a quasi-natural experiment," SAFE Working Paper Series 156, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    2. He, Zhiguo & Kelly, Bryan & Manela, Asaf, 2017. "Intermediary asset pricing: New evidence from many asset classes," Journal of Financial Economics, Elsevier, vol. 126(1), pages 1-35.

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