Dynamic Adjustment towards a Target Bank Capital Structure: South African Evidence

Banks financing decisions remain an enigma, increasingly attracting the attention of banking regulators and corporate finance scholars alike. This article sought to establish whether banks seek to achieve a target capital structure in their financing decision making and if so at what speed of adjustment (SOA) do they gravitate towards this target? Utilising a sample of 16 South African banks for the period 2006-2015, we employed panel data techniques to determine whether banks have a target capital structure that they quest for. A partial adjustment model was estimated using the LSDV with Kiviet (1995) correction estimator which controls for cross-sectional dependence and to determine the speed of adjustment towards this target. Robustness checks were also conducted to establish whether the SOA is dependent on the source of financing used. The results documented that South African banks have a target capital structure which they quest for, and adjust to this target at a SOA of 44% or a half-life of 2.4 years which is relatively faster to that of non-financial firms. These findings relegate capital regulations to be of secondary importance in the determination of bank capital structure. At worst bank capital regulations might not be binding at all.