Abstract:
We estimate the cost of capital for the banking industry and find that while the cost of capital soared for banks in the financial crisis, after the passage of the Dodd-Frank Act, the value-weighted cost of capital for banks fell differentially more than did the cost of capital for nonbanks. The very largest banks drive the decline in expected returns. Over a longer time horizon, the cost of capital for banks may be differentially higher than that for nonbanks relative to the time period before the Graham-Leach-Bliley Act was passed, although in some measures the difference is negative and/or cannot be distinguished from zero. We find some evidence that stress testing has lowered the cost of capital for the largest stress-tested banks, although not for those added more recently to stress testing.