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Bank Capital Structure: A Story of Internationalization and Business Model

Core Content

This paper explores the determinants of bank capital structure (CS) in the context of internationalization and business model differences. It examines how banks' capital structures are influenced by factors such as size, profitability, collateral, risk, and internationalization, using data from credit institutions in France between 1999 and 2015.

Main Determinants of Capital Structure

The paper identifies five main determinants of bank capital structure:

• Size: Larger banks tend to have higher leverage, consistent with the trade-off theory.
• Profitability: Positive impact on leverage, as per the pecking order theory.
• Collateral: Acts as a guarantee for creditors, positively affecting leverage.
• Risk: Higher risk leads to lower leverage due to increased cost of distress.
• Internationalization: Influences leverage through both direct and indirect effects.

Theoretical Predictions

• Trade-off theory (T.O): Balances the tax benefits of debt with the cost of financial distress.
• Pecking order theory (P.O): Prioritizes internal financing over external, with profitability playing a key role.
• Internationalization: Has asymmetric effects on leverage, with liability internationalization having a more significant negative impact than asset internationalization.

Key Findings

General Results

• Size is especially significant for French banks.
• Profitability mainly follows the pecking order theory, except for investment banks.
• Collateral is significant only for investment banks.
• Risk has a negative and significant impact on leverage for all sub-categories of banks.

Internationalization

• Asset internationalization has a negative but insignificant effect on leverage.
• Liability internationalization has a negative and significant effect.
• Considering the business model:
  • Investment banks and foreign investment banks show a negative and significant effect of internationalization on leverage.

Simultaneous Influence

• The simultaneous influence of internationalization and other determinants (size, profitability, collateral, risk) is explored:
  • Size and internationalization have a positive interaction.
  • Profit and internationalization have a positive interaction.
  • Collateral and internationalization have a positive interaction.
  • Risk and internationalization have a positive interaction.

Empirical Analysis

The paper uses a regression model to analyze the relationship between leverage and its determinants, including internationalization:

$$
\begin{array}{l}
Leverage_{i,t} = \alpha + \beta_1 \ln(Size_{i,t-1}) + \beta_2 Profit_{i,t-1} + \beta_3 Coll_{i,t-1} + \beta_4 \ln(Risk_{i,t-1}) + \beta_5 Inter_{i,t-1} * \ln(Size_{i,t-1}) \

• \beta_6 Inter_{i,t-1} + \delta Controls_{i,t-1} + \gamma FE_t + h_i + u_{i,t} \tag{1}
  \end{array}
  $$

• Size and Profitability are positively correlated with leverage.
• Collateral is positively correlated with leverage.
• Risk is negatively correlated with leverage.
• Internationalization has a mixed impact, with liability internationalization showing a significant negative effect.

Business Model and Internationalization

• Investment banks show a different pattern compared to commercial banks.
• The business model (investment vs. commercial) significantly influences the relationship between internationalization and leverage.

Data and Methodology

• Data: From the ACPR (Autorité de Contrôle Prudentiel et de Résolution), covering 73 credit institutions in France between 1999 and 2015.
• Variables:
  • Leverage: Assets/Equity
  • Size: Total assets
  • Profitability: Net income/Assets
  • Collateral: Collateral/Assets
  • Risk: RWA (Risk-Weighted Assets)/Total Assets
  • Internationalization: Assets and liabilities denominated in USD as a proxy for currency diversification.
• Controls: IFRS, Conso, Off BS, Derivatives.
• Standard errors: Clustered at the bank level.
• Fixed effects: Time, foreign, nationality, and bank fixed effects are included.

Summary Statistics

• Leverage: Mean = 15.63, Std. Dev. = 11.48, Min. = 1.64, Max. = 47.5
• Size: Mean = 8.59, Std. Dev. = 2.78, Min. = 4.7, Max. = 14.21
• Profitability: Mean = 0.9, Std. Dev. = 1.35, Min. = -0.85, Max. = 6.60
• Collateral: Mean = 0.19, Std. Dev. = 0.19, Min. = 0, Max. = 0.66
• Risk: Mean = 0.54, Std. Dev. = 0.26, Min. = 0.16, Max. = 1.23
• Internationalization: Mean = 0.22, Std. Dev. = 0.23, Min. = 0, Max. = 0.78 for assets; Mean = 0.27, Std. Dev. = 0.26, Min. = 0, Max. = 0.97 for liabilities.

Additional Results

• Collateral is more significant for investment banks.
• The valuation effect and systematic risk are influenced by internationalization.
• Liability internationalization and risk have a significant negative relationship.
• Asset internationalization and risk have a positive interaction, suggesting diversification in liquidity risk.

Conclusion

• Internationalization is a key factor in identifying capital structure determinants.
• It challenges the traditional understanding of CS determinants by introducing business model and nationality as important variables.
• Next steps include interpreting the results, quantifying them, and conducting robustness checks using instrumental variables and alternative measures of investment banks.

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