The Determinants of Bank Capital Structure

The paper shows that mispriced deposit insurance and capital regulation were of second-order importance in determining the capital structure of large U.S. and European banks during 1991 to 2004. Instead, standard cross-sectional determinants of non-financial firms' leverage carry over to banks,...

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Bibliographic Details
Published in:Review of Finance 2010-10, Vol.14 (4), p.587-622
Main Authors: Gropp, Reint Eberhard, Heider, Florian
Format: Article
Language:English
Subjects:
Banks
Capital structure
Deposit insurance
Financial leverage
Regulation of financial institutions
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Summary:The paper shows that mispriced deposit insurance and capital regulation were of second-order importance in determining the capital structure of large U.S. and European banks during 1991 to 2004. Instead, standard cross-sectional determinants of non-financial firms' leverage carry over to banks, except for banks whose capital ratio is close to the regulatory minimum. Consistent with a reduced role of deposit insurance, we document a shift in banks' liability structure away from deposits towards non-deposit liabilities. We find that unobserved time-invariant bank fixed-effects are ultimately the most important determinant of banks' capital structures and that banks' leverage converges to bank specific, time-invariant targets. Copyright 2010, Oxford University Press.
ISSN:1572-3097
1875-824X
1573-692X
DOI:10.1093/rof/rfp030