Do Banks Satisfy the Modigliani-Miller Theorem ?
13 Pages Posted: 2 Nov 2013 Last revised: 21 Jun 2015
Date Written: November 1, 2013
The capital structure of banks has become the focus of an extended debate among policymakers, regulators and academics. The seminal Modigliani-Miller (1958) theorem is seen as supportive of regulators' drive to require higher equity capital to banks. This raises the question on to what extent does Modigliani-Miller theorem hold for banks. This article brings a new insight of the Modigliani-Miller theorem by considering the implicit government guarantee offered to banks. Our theorem shows that a bank does not satisfy the Modigliani-Miller theorem. The main result indicates that banks will favor leverage instead of equity.
Keywords: Modigliani-Miller, banks, leverage, regulation
JEL Classification: G3, G21, G28
Suggested Citation: Suggested Citation