The Determinants of Bank's Capital Structure: The case of Iran

The capital structure and regulation of financial intermediary firms are important topics for regulators and academic researchers. In general, theory predicts that firms choose their capital structures by balancing the benefits of debt against its costs. The purpose of this paper is to analyze capital structure as a function of bank's specific variable factors. It examines the relationship between bank's capital ratio and the determinants of capital structure in the Iranian banking industry. This paper uses a dynamic panel data during the period 2000 to 2009. The main results suggest that z-score, return on equity and business cycle are positively correlated with capital ratio. But size of bank, cost ratio and deposits ratio are negatively correlated with capital ratio. The excess capital held by Iranian banks seems to be explained by their profitability, the high stability and soundness of banking system. Z-score, regulation, liquid asset and product of regulation and business cycle are positively correlated with capital ratio, but size, profitability, loan-asset ratio and deposits ratio are negatively correlated with capital ratio.