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Measuring the Cost of Equity of Euro Area Banks

2021; RELX Group (Netherlands); Linguagem: Inglês

10.2139/ssrn.3797125

1556-5068

Carlo Altavilla, Paul Bochmann, Jeroen De Ryck, Ana-Maria Dumitru, Maciej Grodzicki, Heinrich Kick, Cecilia Melo Fernandes, Jonas Mosthaf, Colm P. O’Donnell, Spyros Palligkinis,

European Monetary and Fiscal Policies

Download This Paper Open PDF in Browser Add Paper to My Library Share: Permalink Using these links will ensure access to this page indefinitely Copy URL Measuring the Cost of Equity of Euro Area Banks ECB Occasional Paper No. 2021/254 57 Pages Posted: 5 Mar 2021 See all articles by Carlo AltavillaCarlo AltavillaEuropean Central Bank (ECB)Paul BochmannEuropean Central Bank (ECB)Jeroen De RyckEuropean Central Bank (ECB)Ana-Maria DumitruDeutsche BundesbankMaciej GrodzickiEuropean Central Bank (ECB)Heinrich KickEuropean Central Bank (ECB); Goethe University FrankfurtCecilia Melo FernandesUniversity of AmsterdamJonas MosthafEuropean Central Bank (ECB)Charles O'DonnellEuropean Central Bank (ECB)Spyros PalligkinisEuropean Central Bank (ECB) Date Written: January, 2021 Abstract The cost of equity for banks equates to the compensation that market participants demand for investing in and holding banks' equity, and has important implications for the transmission of monetary policy and for financial stability. Notwithstanding its importance, the cost of equity is unobservable and therefore needs to be estimated. This occasional paper provides estimates of the cost of equity for listed and unlisted euro area banks using a three-step methodology. In the first step, ten different models are estimated. In the second step, the models' results are combined applying an equal-weighting procedure. In the third step, the combined costs of equity for individual banks are aggregated at the euro area level and according to banks' business models. The results suggest that, since the Great Financial Crisis of 2007-08, the premia that investors demand to compensate them for the risk they bear when financing banks' equity has been persistently higher than the return on equity (ROE) generated by banks. We show that our estimates of cost of equity have plausible relationships to banks' fundamentals. The cost of equity tends to be higher for banks that are riskier (higher non-performing loan ratios), less efficient (higher cost-to-income ratio), and with more unstable funding sources (higher relative reliance on interbank deposits). Finally, we use bank fundamentals to estimate the cost of equity for unlisted banks. In general, unlisted banks are found to have a somewhat lower cost of equity compared to listed banks, with business model characteristics accounting for part of the estimated difference. JEL Classification: G20, G21, E44, G1 Suggested Citation: Suggested Citation Altavilla, Carlo and Bochmann, Paul and Ryck, Jeroen De and Dumitru, Ana-Maria and Grodzicki, Maciej and Kick, Heinrich and Fernandes, Cecilia Melo and Mosthaf, Jonas and O'Donnell, Charles and Palligkinis, Spyros, Measuring the Cost of Equity of Euro Area Banks (January, 2021). ECB Occasional Paper No. 2021/254, Available at SSRN: https://ssrn.com/abstract=3797125 Carlo Altavilla (Contact Author) European Central Bank (ECB) ( email ) Sonnemannstrasse 22Frankfurt am Main, 60314Germany Paul Bochmann European Central Bank (ECB) ( email ) Sonnemannstrasse 22Frankfurt am Main, 60314Germany Jeroen De Ryck European Central Bank (ECB) ( email ) Sonnemannstrasse 22Frankfurt am Main, 60314Germany Ana-Maria Dumitru Deutsche Bundesbank ( email ) Wilhelm-Epstein-Str. 14Frankfurt/Main, 60431Germany Maciej Grodzicki European Central Bank (ECB) ( email ) Sonnemannstrasse 22Frankfurt am Main, 60314Germany Heinrich Kick European Central Bank (ECB) ( email ) Sonnemannstrasse 22Frankfurt am Main, 60314Germany Goethe University Frankfurt ( email ) Grüneburgplatz 1Frankfurt am Main, 60323Germany Cecilia Melo Fernandes University of Amsterdam ( email ) Roetersstraat 11Amsterdam, NE 1018 WBNetherlands Jonas Mosthaf European Central Bank (ECB) ( email ) Sonnemannstrasse 22Frankfurt am Main, 60314Germany Charles O'Donnell European Central Bank (ECB) ( email ) Sonnemannstrasse 22Frankfurt am Main, 60314Germany Spyros Palligkinis European Central Bank (ECB) ( email ) Sonnemannstrasse 22Frankfurt am Main, 60314Germany Download This Paper Open PDF in Browser Do you have a job opening that you would like to promote on SSRN? 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