EU Bank Capital Structure and Capital Requirements

Abstract: This paper studies the determinants of bank capital structure and discusses how traditional theories of capital structure apply to banks in the light of financial regulation. The purpose is to find out the impact, to EU in particular, of the new regulatory framework that has been pushed through because of the financial crisis post 2007. This is done by a review of capital structure theories and the main amendments to capital requirements globally and with a focus on the EU. Subsequently, an empirical study of the determinants of bank capital structure is performed with panel-data from 51 large European banks 1994-2010 with book leverage as dependent variable. The study finds inconsistency between empirics and theory, suggesting that there is inadequate theoretical ground for bank capital structure. The paper also finds that there are arguments in favour of a non-risk based capital ratio as a regulatory instrument.