PurposeThis study contributes to existing literature by investigating bank capital structure dynamics during the Covid-19 pandemic. The role of contemporary bank-specific determinants of capital structure during this period is analyzed.Design/methodology/approachAn independent t-test is carried out to check the response of bank leverage to the crisis. Using fixed effect estimation and difference general method of moments (GMM), the impact of the shock is examined. An unbalanced quarterly data set from 2016q1 to 2020q3 of all commercial banks in Pakistan is used.FindingsThe study finds that due to procyclicality of capital, during the Covid-19 crisis, the banks preempted a fall in capital and improved their capital positions. The role of bank specific variables in determining capital structure like profitability, size and competition weakened during this period. Evidence suggests that policy rate intervention by the central bank was a significant factor in capital structure decisions during the Covid-19 period. The study finds that macroeconomic shocks have significant impact on capital structure decision-making of banks which goes beyond the bank-specific factors.Originality/valueIt finds evidence of a moderating role of monetary policy in capital structure decision-making which has not been previously highlighted in literature. Monetary policy is found to become an important factor deciding the capital structure of banks during the Covid-19 first 3 quarters. This study also explores the impact of Covid-19 on the bank-specific determinants of capital structure of banks.
This paper provides an insight into the behaviour of the liability side of bank balance sheet in response to explicit deposit insurance. It is an empirical investigation into the choice of a rational bank maximizing its bank value in terms of deposit and non-deposit liabilities after the implementation of explicit deposit insurance. The paper tests how banks' liabilities are affected because of the safety net and its design. Banks lower their leverage ratio as a response to the explicit deposit insurance. The paper finds evidence of depositor shifting funds between the types of deposits in the bank as a result of the explicit deposit insurance. It provides evidence of the importance of setting the right coverage in order to prevent the adverse effects that deposit insurance induces. It studies how the safety net design features affect the bank liability structure. The study finds that besides the explicit deposit insurance, the bank liability structure is affected by factors like tax expense, bank size, overheads, and dividend payout.
We have learned from the Covid 19 crisis that pandemics are inevitable, and the financial systems need to be ready to withstand such global shocks. This study aims to uncover determinants that are vital in maintaining bank profitability during such a crisis by providing evidence on how Covid-19 impacted bank profitability. Additionally, we test whether the crisis moderated the relationship between typical determinants and bank profitability across developed and developing economies. The study uses generalized least squared dummy variable model estimation. Six-year quarterly bank specific data of the top 10 countries from South Asia and Europe based on the highest GDPs is used. The study finds evidence of a significant impact of the pandemic on bank return on assets and equity. Additionally, the evidence suggests that covid-19 impacted bank profitability differently across the developed and developing countries. Covid-19 caused profitability to fall in the homogeneous European banks, whereas profitability increased for South Asian banks during the Covid crisis. We find that the pandemic moderated the relationship between bank profitability and its determinants. Credit quality and bank efficiency became less important in determining bank profitability during the Covid period. In contrast, bank size and maintaining liquidity became more important determinants. Additionally, the magnitude of capital ratio as a determinant of return on assets decreased during Covid. The moderating role of covid-19 on bank profitability determinants would be of value to both academicians and practitioners.
This study investigates the role of market imperfections on the optimal capital structure choice of value maximizing banks, by investigating the impact of information asymmetry on bank liabilities. Random effects estimation (GLS) is used to test the effect of market imperfections on the capital structure of banks by employing 7 years of unbalanced panel data from the largest 15 countries of Asia based on GDP. The study finds evidence of specific individual characteristics impacting the capital structure of Asian banks. However, banking sector market imperfections are also found to play a major role in the capital structure choice of banks. In the presence of a high level of information asymmetry between the bank and the depositor, the bank retains a lower than optimal capital ratio. Transparent banks may be successful in achieving the optimal leverage, consequently lowering their capital cost. Evidence suggests a need to reduce banking sector opacity regarding their risk exposures. To ensure banking sector stability, stronger capital requirements need to be imposed on banks in those Asian countries where information asymmetry is high. The limitations of the study include limited data and the choice of information asymmetry proxies. Future research can address this limitation by employing additional proxies for information asymmetry and increasing the number of countries. Contribution/ Originality: This study is one of very few studies which have investigated the direct impact of information asymmetry on bank capital structure and found evidence for the need for capital regulation on the basis of information asymmetry and not as an indirect consequence of other factors, such as explicit deposit insurance.
The severity in terms of economic activity of the Covid-19 crisis was higher than the global financial crisis. Covid-19 has not only challenged the economic activity across the world but has put to test how the bank operates under the global crises. The objective of this paper is to identify the impact of the Covid-19 crisis on the South Asian banking sector. We investigate if South Asian banks have target leverage and how the Covid-19 crisis impacted their capital structure dynamics. To fulfill the objective, past data on all banks of South Asian countries listed in the Thomson Reuter Refinitiv were considered. The sample ended up including quarterly data of banks from India, Pakistan, Bangladesh, Sri Lanka, Bhutan Nepal and Afghanistan. Engle-Granger's two-step procedure for error correction and two-step GMM estimation was employed to measure the speed of adjustment and the impact of Covid-19 on bank capital. The study found that the capital structure determinants favor the static trade-off theory for South Asian banks. It is also observed that South Asian banks’ capital was negatively impacted by Covid-19. The analysis supports the view of leverage convergence for the capital structure. This study improves our understanding of the capital structure dynamics of banks in response to exogenous shocks in South Asia.
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