How Do Banks Set their Capital?

We have analysed the determinants of capital for banks operating in the Lebanese market between 1994 and 2008. We firstly found that the subsidiaries of foreign banks hold significantly lower capital than their domestic counterparties and the institutional ownership has a productive impact on domestic bank capital. Secondly, the capital of domestic banks is shaped differently from that of foreign banks. For instance, the host market capital regulation is more binding for domestic banks than foreign banks. Besides, domestic banks use their capitalization level to signal, unlike foreign banks that rely on their reputation. Finally, regarding the cyclicality of bank capital, this only applies for domestic banks, whereas foreign bank capital does not follow the economic cycle of the host market.