The Impact of Inflation on the Cost of Bank Capital and Capitalization: A Theoretical and Empirical Study

Abstract

This study investigates the impact of inflation on the cost of bank capital and bank capitalization across different macroeconomic environments. Based on the Modigliani–Miller framework with corporate taxation and the Fisher effect, the paper integrates theoretical foundations, empirical analysis of Halyk Bank (Kazakhstan), and cross‑country comparisons involving the Eurozone and Turkey. We show how inflation inflates nominal financing costs while reducing real debt burdens, influencing leverage incentives and capitalization ratios. Analysis demonstrates that failure to adjust financial metrics for inflation leads to biased assessments of bank cost of capital and risk exposure. Findings highlight the necessity for inflation‑adjusted analysis in emerging and developed market banking systems.