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What Explains the Difference in Leverage between Banks and Nonbanks?

Published online by Cambridge University Press:  06 November 2017

Tobias Berg  and
Jasmin Gider
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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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Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 52 , Issue 6 , December 2017 , pp. 2677 - 2702
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2017 

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Footnotes

1

We thank Valeriya Dinger, Hendrik Hakenes, Florian Heider, Lars Norden, Paul Schempp, Sascha Steffen, Daniel Streitz, the participants of the banking workshop in Muenster (best paper award), and seminar participants at the University of Luxembourg and University of Bonn for valuable comments and suggestions that helped improve the quality of this paper. In addition, we thank Jarrad Harford (the editor) and an anonymous referee for their comments and suggestions. All remaining errors are our own.

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