Journal of Banking & Finance Vol. 155 2023
Leverage and the cost of capital for U.S. banks
Abstract
We examine the relationship between leverage (the assets-to-equity ratio) and the weighted-average cost of capital (WACC) for an unbalanced panel of U.S. bank holding companies (BHCs) over the period spanning 1996 through 2019. We assess the extent to which changes in capital requirements affect the WACCs of these institutions and find significant differences across three, mutually exclusive asset-size classes of BHCs. In particular, the WACCs of small and medium-sized BHCs are found to be more sensitive to changes in capital requirements than the WACCs of large BHCs. For a hypothetical doubling of Tier-1 capital, we find that the largest BHCs saw their WACCs increase by 42 basis points, while the WACCS of small and medium-sized BHCs are estimated to have increased by 62 and 76 basis points, respectively. We attribute differences between these results to differences in the strength and scope of government guarantees and in the composition of BHCs’ assets and liabilities as reported on their balance sheets.
- DOI
- 10.1016/j.jbankfin.2023.107002
- Volume
- 155
- Pages
- 107002
- Language
- en
- Sources
- openalex crossref bibtex:phds-export.bib