What Explains the Difference in Leverage between Banks and Non-Banks?
56 Pages Posted: 5 Mar 2016 Last revised: 8 Mar 2016
Date Written: February 29, 2016
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
Suggested Citation: Suggested Citation