The Determinants of Bank Capital Structure

52 Pages Posted: 20 Oct 2009

See all articles by Reint Gropp

Reint Gropp

Halle Institute for Economic Research

Florian Heider

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: September 30, 2009

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.

Keywords: bank capital, capital regulation, capital structure, leverage

JEL Classification: G32, G21

Suggested Citation

Gropp, Reint and Heider, Florian, The Determinants of Bank Capital Structure (September 30, 2009). ECB Working Paper No. 1096. Available at SSRN: https://ssrn.com/abstract=1478335

Reint Gropp

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

Florian Heider (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

HOME PAGE: http://https://sites.google.com/site/florianheider2/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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