1 Determinants of Bank Capital Structure in Developing Countries: Regulatory Capital Requirement versus the Standard Determinants of Capital Structure

In the finance literature regulatory capital requirements have typically been considered the main factor influencing the choice of capital structure by banks. However, recent evidence (Gropp and Heider, 2007) suggests this may not be the case. In this study we investigate further whether the standard determinants of capital structure apply to banks. Whereas Gropp and Heider examine banks from the USA and Europe we examine banks from developing countries. Our preliminary results suggest that the standard determinants of capital structure do have power in explaining both book capital and market leverage. However, the direction of influence is not always as expected. Collectively, the buffer theory of excess capital seems to explain the level of excess book capital that banks hold while the excess market capital held by banks seems to be determined more by market pressures. While Gropp and Heider (2007) find no evidence to justify the stark distinction between book and market leverage for banks in developed countries, our results provides support to do so for banks in developing countries