## Bank Capital and the Cost of Equity

_IMF Working Papers, December 4, 2019_

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## Bibliographic details
- Authors: Mohamed Belkhir, Ralph Chami, Anis Semet
- Published: December 4, 2019
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513519807.001

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### Overview
- Sample: publicly listed banks from 62 countries over the 1991-2017 period.
- Research question: impact of capital on banks’ cost of equity.
- Core theoretical prediction referenced: more equity in the capital mix leads to a fall in firms’ costs of equity.

### Key findings
- Better capitalized banks enjoy lower equity costs.
- Baseline estimate: a 1 percentage point increase in a bank’s equity-to-assets ratio lowers its cost of equity by about 18 basis points.
- The negative effect of capital on banks’ cost of equity holds in both developed and developing countries.

### Capital composition and investor valuation
- Investors value sheer equity capital the most.
- Other forms of capital, such as Tier 2 regulatory capital, are less (or not at all) valued by investors.

### Implications for the capital-requirements debate
- Provides direct empirical evidence relevant to debates on the effects of higher capital requirements on banks’ funding costs.
- Suggests that increasing equity-based capitalization may reduce banks’ cost of equity, mitigating concerns that higher capital requirements necessarily raise funding costs.

### Subject areas and keywords
- Subject: Banking; Capital adequacy requirements; Financial institutions; Financial markets; Financial regulation and supervision; Loan loss provisions; National accounts; Return on investment; Stock markets; Stocks.
- Keywords: bank capital; bank capital measure; bank capitalization; bank cost; Banking regulation; Capital adequacy requirements; capital measure; capital requirement; capitalized bank; Cost of equity; financial leverage decrease; financial risk; Financial stability; funding cost; Global; Loan loss provisions; return on equity; Return on investment; risk profile; Stock markets; Stocks; WP.

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_Source: https://www.imf.org/en/publications/wp/issues/2019/12/04/bank-capital-and-the-cost-of-equity-48751_