This working paper should not be reported as representing the views of the imf. In particular, as suggested by the tradeoff theory we assume that there is an optimal capital structure for each bank. It is an issue of central importance in any discussion of bank stability, and thus of great interest to regulators. Determinants of capital structure in nigerian banking sector. The asset portion of a bank s capital includes cash. Four important theories are used to explain the capital structure decisions. We describe some of the challenges in measuring capital and briefly discuss a range of approaches for setting capital requirements. The skilled become the banks equityholders whereas the unskilled become depositors. Pdf bank capital structure and capital requirements. Bank capital is often defined in tiers or categories. In this primer, we explain the nature of bank capital, highlighting its role as a form of selfinsurance providing both a buffer against unforeseen losses and an incentive to manage risktaking. It is the aim of this study to look upon the effect of capital structure to the. So it relates to the arrangement of capital and excludes shortterm borrowings. We then show that relative to high credit quality firms, low credit quality firms are more likely to have a multitiered capital structure consisting of both secured bank debt with tight covenants and subordinated non bank debt with loose covenants.
Determinants of bank capital structure the impact of basel iii may 2016 abstract this paper examines which determinants of bank capital structure are reliably decisive for 15 publicly traded european and american banks from 2006 to 2015. Capital structure theories seek to explain why businesses choose different mixes of debt and equity to finance their operations. The goal of this chapter is to discuss the various theories that help to explain the determination of capital structure. The asset portion of a banks capital includes cash. The paper explores a vast body of literature in articulating critical issues in capital structure decision. Introduction capital structure refers to the different options used by a firm in financing its assets bhaduri, 2002. Deposits and bank capital structure abstract in a model with bankruptcy costs and segmented deposit and equity markets, we endogenize the cost of equity and deposit. Kabir hassan and others published the determinants of bank capital structure in the world find, read and cite all. This technical note accompanies the case titled suntrust acquisition of national commerce and describes the various capital ratios that are commonly used in the banking sector as well as gives an example of those ratios using a hypothetical bank. Banking firms represent a special case because of certain unique features in the industry, including a federal safety net and extensive regulation. Throughout the paper, a group of bank specific characteristics are used as control variables in the capital structure regressions. The capital structure is how a firm finances its overall operations and growth by using different sources of funds.
The capital structure of a company is made up of debt and equity securities that comprise a firms financing of its assets. The main variable of interest is the equity ratio, defined as total equity over total assets. Common factors of leverage such as pro t, size, growth, risk, asset structure and interest rate are. Education what is bank capital and what are the levels or. It is accurate, well informed, breaks more stories than its peers and provides an ability to track the new issue high yield and leveraged loans universe which is our future pipeline of distressed opportunities.
Deposits and bank capital structure wharton finance. Given the plethora of forces and issues that capital structure. So to understand bank capital, a sensible starting point is to take stock of our current knowledge about capital structure decisions by firms in general. It creates a strong incentive to manage a bank in a prudent manner, because the bank owners equity is at risk in the event of a failure. Throughout the paper, a group of bankspecific characteristics are used as control variables in the capital structure regressions. New basel iii rules and what they mean for the banks capital. Education what is bank capital and what are the levels. Testing the modiglianimiller theorem of capital structure. In many countries, the cost of debt is taxdeductible whereas the remuneration for equity dividends is not deductible. Common factors of leverage such as pro t, size, growth, risk, asset structure. This paper examines which determinants of bank capital structure are reliably decisive for 15 publicly traded european and american banks from 2006 to 2015.
The reduction of the unequal tax treatment of debt and equity has a significant and economically large impact on the capital structure of banks. Cline, senior fellow, has been associated with the peterson institute for. It is the employment of an asset source of finance for which. Prepared by asli demirguckunt, enrica detragiache, and ouarda merrouche1. The capital structure of banks and practice of bank restructuring. Despite risk neutrality, equity capital earns a higher expected return than direct investment in risky assets. The views expressed in this working paper are those of the authors and do not necessarily represent. Capital structure is the interdependence of the companys longterm and shortterm debts or the mix of the companys equity and debt capital and the capability of the company to cope with them evidently, every company can not develop without investments and credits, so businessmen borrow money in banks or use obligations and bonds and the debt of the company. Capital structure refers to the permanent financing of the company, represented by owned capital and loandebt capital i. It is the permanent financing of a firm represented by longterm debt, preferred stock and net worth. The capital structure puzzle is unravelled and a clear.
The financial crisis of the past two years provided another set of special circumstances in which banks needed to raise. The paper analyses the influence of capital structure on the financial performance of banks in india. One major effect of the introduction of a completely different capital structure for the banks has been a revision to the criteria of how ratings agencies rate the new nvcc and coco securities. So to under stand bank capital, a sensible starting point is to take stock of our current knowledge about capital structure decisions by. The introductions of capital structure theory in 1958 provide tanzania commercial banks with an opportunity to improve their performance through maximizing profit. Finpolconsult bank capital structure and restructuring europe iv executive summary this study presents an empirical analysis of capital and liability management in eight cases of bank restructurings and resolutions from eight different european countries. When the stock is traded and markets are viewed to be efficient, the objective is. Aswath damodaran 3 the objective in decision making n in traditional corporate finance, the objective in decision making is to maximize the value of the firm. We describe some of the challenges in measuring capital and briefly discuss a. The paper exploits exogenous variation in the tax treatment of debt and equity created by the introduction of a tax shield for equity. Bank capital requirements and capital structure opencommons.
This paper proposes a model of financial markets and corporate finance, with asymmetric information and no taxes, where equity issues, bank debt, and bond. Pdf capital structure and financial performance of banks. Another theory is the tradeoff theory of capital structure which explains the level of leverage of the bank, that is whether the bank is. Also, our model explains why bank equity is more expensive than deposits and has implications for the optimal bank size, the impact of bank capital on social welfare and several. Pdf this paper studies the determinants of bank capital structure and discusses how traditional theories of capital structure apply to banks in. The cost depends on the health of the companys balance sheeta triple aaa rated firm can borrow at extremely low rates vs. It is accurate, well informed, breaks more stories than its peers and provides an ability to track the new issue high yield and leveraged loans universe which is. This is true for both book and market leverage, tier 1 capital, when controlling for risk and macro factors, for us and eu banks examined separately, as well as when. Jun 25, 2019 the debt capital in a companys capital structure refers to borrowed money that is at work in the business. Bank capital is the difference between a banks assets and liabilities, and it represents the net worth of the bank or its value to investors.
This paper shows that a reduction in tax discrimination between debt and equity funding leads to better capitalized financial institutions. Pdf taxes and bank capital structure semantic scholar. Bank capital structure basically represents the banks choice of how to finance its balance sheet, that is, what mix of equity, subordinated debt, and deposits to use. We then show that relative to high credit quality firms, low credit quality firms are more likely to have a multitiered capital structure consisting of both secured bank debt with tight covenants and subordinated nonbank debt with loose covenants. The empirical analysis of the impact of bank capital. Apr 29, 2019 bank capital is the difference between a bank s assets and liabilities, and it represents the net worth of the bank or its value to investors.
Taxes and bank capital structure glenn schepens october 20 abstract this paper shows that a reduction in the tax discrimination between debt and equity funding leads to better capitalized. Subsequently, an empirical study of the determinants of bank capital structure is performed with paneldata from 51 large european banks 19942010 with book leverage as dependent variable. Chapter iii concepts and theories of capital structure and profitability. Contingent debt and performance pricing in an optimal. Theories of bank capital structure capital structure is defined as the specific mix of debt and equity a firm uses to finance its operations. The capital structure of banks and practice of bank. This theory insists that banks should do a costbene. Instead, standard crosssectional determinants of nonfinancial firms leverage carry over to banks, except for banks whose capital ratio is close to the regulatory. Deposits and bank capital structure wharton finance university.
Pdf the determinants of bank capital structure in the world. The paper shows that mispriced deposit insurance and capital regulation were of secondorder importance in determining the capital structure of large u. The determinants of bank capital structure european central bank. Debt comes in the form of bond issues or longterm notes. Capitalstructure is the most essential real time news and analysis service in the european distressed space. These are the static tradeoff theory, agency theory, peckingorder theory and bankruptcy cost theory. This study shall also address the endogeneity problem if it exists.
And this has resulted in a series of downgrades by the major agencies of the canadian banks. Banks emerge endogenously and bank capital structure is relevant. Banks also manage financial, rather than physical, assets implying lower bankruptcy costs than industrial firms. Financial regulation, bank capital requirements, capital structure william r. The study covers a period of five years from 2011 to 2015 and 21 banks are selected for the study. New basel iii rules and what they mean for the banks. Capital structure policy involves a tradeoff between risk and return 1 using more debt raises the riskiness of the firms earnings stream. Issues such as corporate governance, agency costs, and capital structure also play important role because of the crucial roles played by. By analyzing capital structure and bank performance, there is the possibility of endogeneity problem between capital structure and bank performance. Capital structure in nonfinancial firms while banks may be special along a number of dimensions, in the first instance, banks are firms. Empirical evidence roman goncharenko asad rauf y november 7, 2016 abstract we analyze the capital structure of banks within the european economic area eea consisting of tier 1 contingent capital bonds cocos. The results demonstrate that a more equal treatment of debt and equity increases bank capital ratios, driven by an.
662 843 523 331 1205 272 1143 1235 1290 685 1013 15 1285 905 1266 1196 774 1258 478 353 1028 588 257 228 432 318 551 707 770 1133 962 635 851 77 451