Bank capital structure, capital requirements and SRISK across bank ownership types and financial crisis: panel VAR approach

Abstract

This paper analyzes the simultaneous and dynamic multi-directional interrelationships between bank capital structure, capital requirements and SRISK (systemic risk) across the bank ownership type—foreign and domestic banks—and the financial crisis. We check whether these interrelationships are significantly different for foreign banks spread over 18 countries. To overcome econometric problems (endogeneity and causality), we build a panel vector auto-regression for 170 banks operating in the French market. There is a dynamic bidirectional interrelationship over a whole period. All these findings are sensitive to ownership type as well as to crisis period. A negative bidirectional relationship between SRISK and capital ratio has been found for domestic banks. Forecast error variance decompositions chooses leverage as the most endogenous variable. Impulse-response functions separates capital ratio from SRISK that affects leverage in the banking sector. In a crisis period, we find that the response of leverage and capital ratio to SRISK shock is negative.