The Determinants of Bank Capital Structure

Reint Gropp and Florian Heider

Review of Finance, 2010, vol. 14, issue 4, 587-622

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 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.

Date: 2010
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Working Paper: The determinants of bank capital structure (2009)
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