XXV Edition

1-2 December 2016"

The Determinants of Bank Capital Structure: a European Study

Shaban Mais, University of Essex

The paper investigates the capital structure determinants of the European Economic Area’s listed commercial banks. We include the global financial crisis and the euro sovereign debt crisis and also investigate moral hazard effects derived from too-big-to-fail status and alternative types of risk, including that derived from ESG issues. In line with the extant corporate finance literature, we find that equity capital is negatively associated with size and positively related to profits, market-to-book ratios, and dividends. Our evidence also shows that market risk significantly increases banks’ equity capital, which confirms the regulatory view that riskier banks are forced to hold higher equity; while asset quality measured by non-performing loans does not seem to significantly affect banks’ capital structure decisions. Moreover, we find a positive relationship between equity capital and banks’ reputational risk related to Environmental Social Governance (ESG) issues. Finally, it appears that large systematically important banks hold significantly lower equity capital. The study offers potentially important implications as the debate on optimal capital structures of banks is still ongoing.

Area: Capital Structure and Corporate Finance

Keywords: Bank Capital; Capital Structure; Financial Crisis; TBTF; Reputational Risk

Paper file

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