Bank Stock Returns, Leverage and the Business Cycle

15 Pages Posted: 12 Sep 2012

See all articles by Kostas Tsatsaronis

Kostas Tsatsaronis

Bank for International Settlements (BIS) - Monetary and Economic Department

Jing Yang

Government of Canada - Bank of Canada

Abstract

The returns on bank stocks rise and fall with the business cycle, making bank equity financing cheaper in the boom and dearer during a recession. This provides support for prudential tools that give incentives for banks to build capital buffers at times when the cost of equity is lower. In addition, banks with higher leverage face a higher cost of equity, which suggests that higher capital ratios are associated with lower funding costs.

JEL Classification: G3, G21, G28

Suggested Citation

Tsatsaronis, Konstantinos and Jing, Yang, Bank Stock Returns, Leverage and the Business Cycle. BIS Quarterly Review, March 2012, Available at SSRN: https://ssrn.com/abstract=2100407

Konstantinos Tsatsaronis (Contact Author)

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland
(41 61) 280 8082 (Phone)
(41 61) 280 9100 (Fax)

Yang Jing

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

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