Capital structure, ownership and crisis: how different are banks?

Abstract

PurposeThe purpose of this study is to examine the issue of bank capital structure which has been widely debated in recent times, especially in view of the envisaged implementation of the revised Basel capital standards. An issue that has not been adequately addressed is the factors affecting capital structure of banks from a corporate finance perspective. To address this, the authors assemble data on publicly listed Indian banks for an extended time span and compare the findings with a comparable sample of largest non-financial firms.Design/methodology/approachIn view of the longitudinal nature of the data, the authors use panel data techniques to examine the issue.FindingsThe analysis indicates that profitability, growth opportunities and risk are the factors that are most relevant in influencing bank capital. Second, the crisis appears to have exerted a perceptible impact on bank capital.Practical implicationsOn balance, the findings refute the conventional wisdom that bank capital structure is purely a response to the regulatory requirements. Instead, the results would that banks’ capital decisions are influenced by several non-regulatory considerations as well, including government policies toward banks, which is particularly relevant in countries with predominantly state-owned banking systems.Originality/valueFirst, the authors examine the relevance of bank ownership for leverage, an aspect not adequately addressed in emerging economy banking systems. Second, they consider the impact of regulatory pressure on bank leverage, which assumes relevance in the aftermath of the crisis, wherein banks have been hard-pressed for capital. And finally, they contribute to the thin literature on the interlinkage between capital structure and board structure for banks.