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Regulatory changes and the cost of equity:evidence from French banks

Author

Listed:
  • 0. De Bandt
  • B. Camara
  • P. Pessarossi
  • M. Rose

Abstract

In the paper, we first investigate the impact of an increase in capital requirements on the equity risk (beta) of listed banks in France. We find that an increase in capital ratios reduces banks’ systematic risk. This leads to a decrease in shareholders’ required return on equity, providing evidence in favour of the Modigliani-Miller theorem: the greater cost of capital due to higher capital ratios appears to be mitigated by the decrease in shareholders’ expected return on equity. We then analyze the impact of liquidity position and find almost no evidence so far that investors take banks’ liquidity risk into account.

Suggested Citation

  • 0. De Bandt & B. Camara & P. Pessarossi & M. Rose, 2014. "Regulatory changes and the cost of equity:evidence from French banks," Débats économiques et financiers 11, Banque de France.
    • Handle: RePEc:bfr:decfin:11
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    References listed on IDEAS

    as
    1. Allen N. Berger & Christa H. S. Bouwman, 2009. "Bank Liquidity Creation," The Review of Financial Studies, Society for Financial Studies, vol. 22(9), pages 3779-3837, September.
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    5. Jean-Paul Pollin, 2011. "La nouvelle régulation bancaire microprudentielle : principes, incidences et limites," Revue d'économie financière, Association d'économie financière, vol. 0(3), pages 145-170.
    6. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
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    More about this item

    Keywords

    Modigliani-Miller; cost of equity; solvency ratios; liquidity ratios.;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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