How much would tighter federal regulations cost banks? When it comes to higher capital requirements, not much, according to new research from Washington University.
By looking at what banks do rather than what they say, finance professors at Washington University in St. Louis’ Olin Business School estimate that the effect on bank profitability of new regulations would be hardly noticeable.
“We calculate the shadow cost of capital requirements for bank proﬁtability using data on their participation in a costly loophole that helped them bypass the requirements,” write co-authors Roni Kisin, PhD, and Asaf Manela, PhD, both assistant professors of finance at Olin.
“Since banks balanced the increase in proﬁts due to the relaxation of capital constraints with the cost of using the loophole, their use of the loophole reveals their perceived costs of capital requirements.”
Kisin and Manela estimate that a 10 percentage points increase in the tier 1 risk-based capital requirement for banks would cost about $2 billion a year for all banks that exploited the loophole, and around $4 billion for all U.S. banks combined.
The cost to an average bank would be about $143 million, or 4 percent of its annual proﬁts.
In other words, even with new regulations on bank capital ratios taking effect Jan. 1, 2015, effects on bank profitability will be small.