Author(s): Morten Balling
Date published: Oct 2015
SUERF Policy Note, Issue No 2
by Morten Balling, Aarhus University and SUERF
Abstract: Since 2007, bank capital regulation has been strengthened in Europe and globally. Bank organizations have expressed serious concerns about the impact of higher capital requirements on bank funding costs and on the lending capacity of banks. The message of a 1958-Article by Modigliani and Miller is that bankers should not worry. Changes in the debt-equity ratio do not affect the firm’s average cost of capital. With reference to a sample of recent empirical studies, this SUERF Policy Note concludes that the tougher and more complex capital regulation requires modification but not rejection of the M&M analysis.
JEL: E44, F36, G21, G28, G32
Keywords: Basel 3, bank capital regulation, capital adequacy, capital requirements directive, capital structure irrelevance, cost of capital.
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