In the euro area, banks are the most important source of funding for the corporate sector. As a
result, the viability of the banking sector is crucial for the investment potential of the corporate
sector. However, since the crisis in 2008 bank market valuations have been in distress. This is a
threat to the role of banks as transmitter of funds to the real economy. To extend loans, banks have
to hold regulatory equity buffers. Low bank valuations deteriorate the ability of banks to attract fresh
equity, thereby reducing access to lending for firms. In this project, I investigate two crucial
determinants of bank market valuations, and how they impact banks’ lending behaviour. The first is
cost of equity (COE), the discount rate over which future profitability is discounted to the present. In
a first work package, I examine whether (systemic) risk increases COE, and whether this impacts
lending (pricing, volume and borrower characteristics are all taken into account). In a second work
package, I focus on regulation. I analyze whether more regulation results in a lower COE, and how
this translates to the real economy via corporate lending. Lower bank valuations can also be a
consequence of lower expected profitability. In the final work package, I analyze how bank market
valuations react following shocks to banks’ expected dividends. Again, the ultimate goal is to assess
how changes in market valuation impact banks’ lending behaviour