Determinants of Capital Structure in the Banking Sector: Lessons from the Western Balkans

Abstract

The study examines the capital structure of the Western Balkan banking industry across the period 2015 - 2020. Forty-seven of the total Western Balkan-based commercial banks were included in the study. By constructing a balanced panel, this study uses pooled ordinary least squares, fixed and random effects regressions, to assess the relationship between bank book leverage as the dependent variable and the set of bank-specific explanatory variables that include profitability, leverage ratio, bank size, earnings volatility, collateral, growth opportunities, and liquidity. The study shows a significant positive relationship between profitability and book leverage for the period studied. In contrast, leverage ratio, earnings volatility, collateral, growth, and liquidity significantly negatively impact the book leverage of Western Balkan banks. An extensive and comparative study of banks operating in Western and Eastern Balkan countries is recommended. The findings have practical implications for bank executives. They will assist them in identifying the bank-specific factors that influence the capital structure and selecting values that promote optimal capital structure. The findings of this study can help regulators develop an effective prudential framework. This study opens up new avenues for further research in this area for academics, researchers, and analysts.