Kapitaldekninig, risiko og avkastningskrav for nordiske forretningsbanker : Regulatoriske krav og bankenes finansieringskostnad : en empirisk analyse i et Modigliani & Miller-rammeverk

Abstract

The newly agreed Basel framework will see banks come to use more equity capital to finance their assets. This has triggered warnings about the cost of requiring banks to use more equity. The question is whether the Modigliani-Miller propositions are relevant at all when thinking about bank capital regulation. The purpose of this dissertation has been mainly to investigate the relationship between change in risk, arising from exposure to general market movements, and loss-absorbing capital, in a sample consistent of Nordic banks. We used a sample of 14 banks, all of which had headquarters in one of the Nordic countries, over the period 1994 – 2012. We approximated systemic risk with equity beta and we measured loss-absorbing capital by Tier 1 common equity. We tried to model how shifts in funding affect required rates of return, and we used a Modigliani and Miller (henceforth M&M) based framework similar to Miles, Yang and Marcheggiano (2011). Furthermore, the cost of capital was estimated using the single-factor capital asset pricing model (CAPM), where expected return is a function of risk-free rates and a bank-specific risk premium. The M&M theorem states that if the beta of bank debt is zero, the risk premium on equity should decline linearly with leverage. We found a positive association between changes in systemic risk and capital, i.e a positive change in leverage would imply a positive change in beta, and thus, indirectly a higher required rate of return and vice versa. The results are in accordance with the theory. However, our results suggest that the M&M effect is weaker than what the theory predicts, that is, our estimates predict a much smaller change in equity beta due to increased loss-absorbing capital. The finding suggests that the capital structure is not completely irrelevant for our sample of banks. The deviation may be due to violations of the strict assumptions underlying the theory, such as a perfect market, no information asymmetries, no friction or costs related to trading, borrowing and lending or taxes.