The similarity in sign and significance of the estimated coefficients for banks’ leverage to the standard corporate finance regression suggests that a pure regulatory view does not apply to banks’ capital structure. But can the results be explained by banks holding buffers of discretionary capital in order to avoid violating regulatory thresholds? Recall from Table IV that banks with higher market-to-book ratios, higher profits and that pay dividends should hold less discretionary capital since they can be expected to face lower costs of issuing equity. However, these banks hold more discretionary capital. Moreover, collateral matters for the banks in.
