The Cost of Capital for Banks

Jens Dick-Nielsen, Jacob Gyntelberg, Christoffer Thimsen

Publikation: KonferencebidragPaperForskningpeer review

Abstrakt

Expected returns based on analyst earnings forecasts show that when the tier 1 ratio increases the cost of equity and debt capital for banks decreases whereas total cost of capital remains unchanged. These findings are consistent with the conservation of risk principle (Modigliani and Miller, 1958). Empirically, the disadvantages of equity funding are small; a 10 pp increase in the tier 1 ratio preserves total risk but causes a 2.3% loss of firm value due to the lower tax shield. The loss is equivalent to a 2-8 bps increase in borrowing rates. These findings have important implications for the cost of substantially heightened capital requirements.
OriginalsprogEngelsk
Publikationsdato2020
Antal sider67
StatusUdgivet - 2020
BegivenhedThe 80th Annual Meeting of American Finance Association. AFA 2020 - San Diego, USA
Varighed: 3 jan. 20205 jan. 2020
Konferencens nummer: 80
https://afajof.org/annual-meeting/

Konference

KonferenceThe 80th Annual Meeting of American Finance Association. AFA 2020
Nummer80
LandUSA
BySan Diego
Periode03/01/202005/01/2020
Internetadresse

Emneord

  • Bank funding
  • Cost of equity
  • Total cost of capital
  • Leverage effect
  • Capital buffers

Citationsformater

Dick-Nielsen, J., Gyntelberg, J., & Thimsen, C. (2020). The Cost of Capital for Banks. Afhandling præsenteret på The 80th Annual Meeting of American Finance Association. AFA 2020, San Diego, USA.