Evaluating Regulatory Reform: Banks' Cost of Capital and Lending

Abstract

AbstractWe 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% and declined by more than 4% 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 20‐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.