How Much is the Choice of Capital Structure Important for Bank Profitability in Croatia?

Whether the capital structure design may be a source of a comparative advantage in the business of banking has been rarely empirically answered due to researchers’ focus on the complications related to the bank capital regulation in the last two decades. In the paper, the capital structure and profi tability nexus is being explored using the data from the Croatian banking sector in the period from 2003 to 2008. A panel data analysis was employed for the 28 commercial banks. The main assumption that heterogeneity in the capital structure of banks in the Republic of Croatia explains differences in their profi tability is confi rmed. It has been found that banks with a higher equity fi nancing and insured deposits have a higher return on assets. At the same time a higher level of the capital adequacy implies a lower profi tability. Some inconsistencies of the research results and theoretical framework could be explained by introduction of the marginal obligatory reserve. At last, a necessity of managing the funding structure with a purpose of improving the bank profi tability is pointed out.