NY Fed report shows “living will” regulation raises banks’ cost of capital 10% per year

In a staff report, NY Fed researchers present findings that “living will” regulation increases a bank’s annual cost of capital by 22 basis points, or 10% of total funding costs using a synthetic control research design. This effect is stronger in banks that were measured as systemically important before the regulation’s announcement. Researchers interpret these findings as a reduction in “too big to fail” subsidies. The size of this effect is large: a back-of-the-envelope calculation implies a subsidy reduction of $42 billion annually. The impact on equity costs drives the main effect. The impact on deposit costs is statistically indistinguishable from zero, representing a good placebo test for our empirical strategy.

Read the full report

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