What Explains the Difference in Leverage between Banks and Nonbanks?

Tobias Berg · Jasmin Gider

56 citations0/0 files storedJournal of Financial and Quantitative Analysis

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Banking stability, regulation, efficiency Corporate Finance and Governance Financial Analysis and Corporate Governance

Abstract

Banks have much more leverage than nonbanks. In this article, we use a joint sample of banks and nonbanks between 1965 and 2013 to analyze the determinants of this leverage difference. We find that a single factor, asset risk, is able to explain up to 90% of this difference. Banks’ assets consist of a diversified portfolio of nonbank debt. Therefore, banks have much lower asset risk than do nonbanks. Because asset risk is a major determinant of capital structure choice, this factor is able to explain a large fraction of the difference between bank and nonbank leverage.

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References

1984Financial Intermediation and Delegated Monitoring 1995What Do We Know about Capital Structure? Some Evidence from International Data 1988The Determinants of Capital Structure Choice 1994The Benefits of Lending Relationships: Evidence from Small Business Data 2007Capital Structure Decisions: Which Factors Are Reliably Important?1995What Do We Know about Capital Structure? Some Evidence from International Data 1996Optimal Capital Structure, Endogenous Bankruptcy, and the Term Structure of Credit Spreads 2013How does capital affect bank performance during financial crises?

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