The determinants of bank capital structure

Reint Gropp () and Florian Heider ()
Additional contact information
Reint Gropp: European Business School, Wiesbaden and Centre for European Economic Research (ZEW) Mannheim, Germany., http://www.ebs.edu/
Florian Heider: European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany., http://www.ecb.europa.eu/home/html/index.en.html

No 1096, Working Paper Series from European Central Bank

Abstract: 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 timeinvariant bank fixed effects are ultimately the most important determinant of banks’ capital structures and that banks’ leverage converges to bank specific, time invariant targets. JEL Classification: G32, G21.

Keywords: bank capital; capital regulation; capital structure; leverage. (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-bec, nep-cfn, nep-reg and nep-rmg
Date: 2009-09

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