As the last global financial crisis has shown, macroeconomic shocks have huge impacts on numerous economic sectors. The distortions caused by the crisis led to world-wide declines in trade, output and employment.
This paper takes special emphasis on bank leverage ratios. Our longitudinal sample ranges from 2004 to 2015, including 5,069 observations of 483 banks in the United States and Europe.
Our investigations are based on a modified Gropp and Heider (2010) style linear two-way error component model that uses leverage determinants of non-financial firms to describe bank capital structure. It is investigated how bank capital structure and its determinants respond to the financial crisis. The results show that the financial crisis had strong impacts.
Table of Contents
1 Introduction
2 Background
2.1 Bank Capital Structure
2.2 The Financial Crisis
3 Data, Variables and Descriptive Statistics
4 Methodology and Results
4.1 Baseline Model
4.2 Model Modification and Crisis Indicators
4.3 Insights on Liabilities
5 Discussion
6 Conclusion
Appendix 1: Banks’ Countries of Origin
Appendix 2: Further Insights on Bank Liabilities
Objectives and Research Scope
This master thesis investigates how the global financial crisis impacted the capital structure of listed banks in the United States and Europe. The study aims to determine whether standard capital structure theories, typically applied to non-financial firms, can effectively explain bank leverage variations and how these determinants shifted in response to the macroeconomic shocks of 2008 and 2009.
- Analysis of bank leverage determinants in a longitudinal sample (2004–2015) of 483 banks.
- Application and extension of the Gropp and Heider (2010) linear two-way error component model.
- Examination of the effects of the financial crisis on both book and market leverage.
- Investigation into the substitution effects between different bank liabilities (deposits vs. non-deposit liabilities) during the crisis.
Excerpt from the Thesis
2.1 Bank Capital Structure
Literature on capital structure decisions is in general based on non-financial firms. Diamond and Rajan (2000) ask whether bank capital structure matters at all. They refer to Gorton and Pennacchi (1990) arguing that banks do not have to face issuance costs based on asymmetric information. Diamond and Rajan (2000) find that bank capital decisions are important as they have an effect on a bank’s safety, its capability to refinance, its capability to receive borrowers’ repayment and its willingness to liquidate the repayments.
Gropp and Heider (2010) further state that the standard textbook’s opinion would be that it is unnecessary to investigate on the capital structure of banks as deviations from Modigliani and Miller are dominated by capital regulations (Mishkin, 2000; Mishkin, 2007). Indeed, large parts of finance literature assume that especially capital requirements determine banks’ capital ratios (e.g. Jackson et al. 1999). However, the results of Gropp and Heider (2010) stand in contrast to these findings as they indicate that regulation is only a subordinate bank capital structure determinant.
There are studies examining the effects on bank capital coming from risk (Shrieves and Dahl, 1992), asset risk in the environment of regulatory innovations (Flannery and Rangan, 2008), liquidity (Myers and Rajan, 1995), market discipline (Allen et al. 2011), tax effects (Schepens, 2016) or the operating environment (De Jonghe and Ötzekin, 2015; Brewer et al, 2008). Others, like Harding et al. (2007) find evidence that in the presence of deposit insurance, a fixed capital standard and taxes, there is an interior optimal bank capital ratio.
Summary of Chapters
1 Introduction: This chapter provides the research motivation by highlighting the impact of the global financial crisis on the banking sector and outlining the study's objective to examine bank capital structure determinants.
2 Background: This section reviews existing corporate finance literature, specifically capital structure theories like the trade-off, pecking-order, and market-timing theories, and discusses their applicability to the banking industry.
3 Data, Variables and Descriptive Statistics: This chapter details the sample construction, including data sources for 483 listed banks, and defines the variables used to measure bank leverage and its potential determinants.
4 Methodology and Results: This chapter presents the linear two-way error component model and discusses the empirical findings regarding leverage determinants, the impact of crisis indicators, and liability shifts.
5 Discussion: This section interprets the empirical findings, comparing them with established theories and identifying the reasons for observed variations in bank behavior during the crisis.
6 Conclusion: This final chapter synthesizes the main results, confirms the significant impact of the financial crisis on bank capital structure, and notes limitations such as the exclusion of regulatory changes like Basel III.
Keywords
Bank Capital Structure, Financial Crisis, Leverage, Capital Structure Theories, Non-deposit Liabilities, Deposits, Gropp and Heider Model, Bank Fixed Effects, Asset Risk, Market-to-book Ratio, Corporate Finance, Banking Regulation, Panel Data, Economic Shock, Financial Intermediaries.
Frequently Asked Questions
What is the core research subject of this thesis?
The thesis examines the impact of the last global financial crisis on the capital structure of banks in the United States and Europe.
What are the primary themes addressed?
Key themes include the applicability of non-financial firm capital structure theories to banks, the influence of unobserved bank fixed effects, and the decomposition of bank liabilities during market downturns.
What is the central research question?
The research investigates how bank capital structure and its determinants changed in response to the macroeconomic shocks caused by the global financial crisis between 2004 and 2015.
Which scientific method is employed?
The author uses a modified Gropp and Heider (2010) linear two-way error component model to analyze a longitudinal panel dataset of 483 banks.
What topics are discussed in the main body?
The main body covers the theoretical background of capital structures, the methodology for testing these theories on bank data, and the empirical results concerning leverage and liability shifts during pre-crisis and crisis periods.
Which keywords best characterize this work?
The work is characterized by terms such as Bank Capital Structure, Financial Crisis, Leverage, Asset Risk, and Capital Structure Theories.
Does the financial crisis have a statistically significant impact on bank leverage?
The results show ambiguous findings; while pre-crisis periods show clear leverage increases, the crisis period itself does not consistently support a negative effect on bank leverage across all model specifications.
How do bank liabilities change during the crisis?
The study finds a substitution effect where banks decrease non-deposit liabilities and increase their reliance on deposits, suggesting a move toward less risky assets during the crisis years.
- Citar trabajo
- Adrian Schmid (Autor), 2016, The Impact of the Financial Crisis on Bank Capital Strucutre, Múnich, GRIN Verlag, https://www.grin.com/document/494289
