Publications
Publications
- American Economic Review: Papers and Proceedings
Do Strict Capital Requirements Raise the Cost of Capital? Bank Regulation, Capital Structure and the Low Risk Anomaly
By: Malcolm Baker and Jeffrey Wurgler
Abstract
Traditional capital structure theory predicts that reducing banks' leverage reduces the risk and cost of equity but does not change the weighted average cost of capital, and thus the rates for borrowers. We confirm that the equity of better-capitalized banks has lower beta and idiosyncratic risk. However, over the last 40 years, lower-risk banks have not had lower costs of equity (lower stock returns), consistent with a stock market anomaly previously documented in other samples. A calibration suggests that a binding 10 percentage point increase in Tier 1 capital to risk-weighted assets could double banks' risk premia over Treasury bills.
Keywords
Citation
Baker, Malcolm, and Jeffrey Wurgler. "Do Strict Capital Requirements Raise the Cost of Capital? Bank Regulation, Capital Structure and the Low Risk Anomaly." American Economic Review: Papers and Proceedings 105, no. 5 (May 2015): 315–320.
Supplemental Information
For a more in-depth discussion of this paper, read the NBER Working Paper by Baker and Wurgler.
About The Author
