What Explains the Difference in Leverage between Banks and Non-Banks?

Abstract

Banks have much more leverage than non-banks. This paper uses a joint sample of banks and non-banks between 1965 and 2013 to analyze the determinants of this leverage difference. We find that one single factor - asset risk - is able to explain up to 90% of this difference. Banks' assets consist of a diversified portfolio of non-bank debt. Therefore, banks have a much lower asset risk than non-banks. Since asset risk is a major determinant of capital structure choice, this single factor is able to explain a large fraction of the difference between bank and non-bank leverage.

Keywords: Bank Capital, Bank Leverage, Capital Regulation

JEL Classification: G21, G32