Naunheim, Florian, Gehrke, Matthias and Heidemann, Jeffrey - Archives of Data Science, Series A

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Title The Effects of the Regulatory Capital Requirements of Basel III on the Cost of Capital of Banks
Authors Naunheim, Florian, Gehrke, Matthias and Heidemann, Jeffrey
Year 2018
Volume 5(1)
Abstract As a response to the financial crises, the Basel Committeeon Banking Supervisions (BCBS) endorsed the Basel III framework in 2010 to increase the overall loss absorbency of the banking sector. This paper contributes to the ongoing discussion on higher capital requirements as it analyzes the relation of higher capital requirements to the weighted average cost of capital (WACC). Based on a theoretical background from corporate finance a linear model is estimated using year-over-year differences for OLS and fixed-effects estimations. The sample is constructed using observations for about 680 banks from 22 jurisdictions covering the years 2003 to 2016. The results show a significant, positive relationship between the capital ratio and the WACC. However, the effect diminishes after the adoption of Basel III for emerging markets and raises for advanced economies.