Elijah Brewer III, George G. Kaufman, and Larry D. Wall
Working Paper 2008-27
December 2008

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This paper extends the literature on bank capital structure by modeling capital structure as a function of important public policy and bank regulatory characteristics of the home country, as well as of bank-specific variables, country-level macroeconomic conditions, and country-level financial characteristics. The model is estimated with annual data from 1992 to 2005 for an unbalanced panel of the seventy-eight largest private banks in the world headquartered in twelve industrial countries. The results indicate that bank capital ratios are significantly affected in the hypothesized directions by most of the bank-specific variables. Several of the country characteristic and policy variables are also significant with the predicted sign: Banks maintain higher capital ratios in home countries in which the bank sector is relatively smaller and in countries that practice prompt corrective actions more actively, have more stringent capital requirements, and have more effective corporate governance structures.

JEL classification: G21, G29

Key words: capital requirements, country public and regulatory policies, large banks

The authors thank James R. Barth, Robert Bliss, Diana Hancock, Mark Flannery, Charles Goodhart, Edward Kane, Geoffrey Miller, Mitchell Petersen, Triphon Phumiwasana, participants at the Finlawmetrics 2008 Conference at Bocconi University, and an anonymous reviewer for valuable comments and suggestions on earlier versions of this paper. The research assistance of Syed Hussain is greatly appreciated. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.

Please address questions regarding content to Elijah Brewer III, Finance Department, DePaul University, Suite 6100, 1 East Jackson Blvd., Chicago, IL 60604, 312-362-5151, ebrewer@depaul.edu, and the Federal Reserve Bank of Chicago, 230 South Lasalle Street, Chicago, IL 60604-1413; George G. Kaufman, College of Business Administration, Loyola University Chicago, 1 East Pearson Street, Chicago, IL 60611-2196, 312-915-7075, gkaufma@luc.edu, and the Federal Reserve Bank of Chicago, 230 South LaSalle Street, Chicago, IL 60604-1413; and Larry D. Wall, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, GA 30309-4470, 404-498-8937, larry.wall@atl.frb.org.

For further information, contact the Public Affairs Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, Georgia 30309-4470, 404-498-8020.