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Evaluating regulatory reform: banks’ cost of capital and lending

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Abstract

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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  • Anna Kovner & Peter Van Tassel, 2018. "Evaluating regulatory reform: banks’ cost of capital and lending," Staff Reports 854, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:854
    Note: Revised July 2020. Previous title: “Regulatory Changes and the Cost of Capital for Banks”
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    Cited by:

    1. Richard K. Crump & João A. C. Santos, 2018. "Review of New York Fed studies on the effects of post-crisis banking reforms," Economic Policy Review, Federal Reserve Bank of New York, issue 24-2, pages 71-90.
    2. Satish Thosar & Bradley Schwandt, 2019. "Has ‘Too Big To Fail’ Been Solved? A Longitudinal Analysis of Major U.S. Banks," JRFM, MDPI, vol. 12(1), pages 1-14, February.

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    More about this item

    Keywords

    cost of capital; beta; bank regulation; Dodd-Frank Act; banks;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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