Are the determinants of banks’ and insurers’ capital structures homogeneous? Evidence using South African data

Abstract

This paper investigates the factors that determine capital structures of financial firms using two separate samples of banks and insurance companies and draws comparisons therefrom. It utilizes two samples of 16 South African banks and 26 South African insurance companies for the period 2006–2015. The relationship between leverage and firm-level determinants of capital structure is tested for each sample. The results show that the standard firm-level determinants of capital structure empirically observed on non-financial firms also apply for banks and insurers. Confirming the fundamental differences between banks and insurance companies, the study observed that the 2007–2009 global financial crisis (GFC) have a negative impact on capital structures of banks (meaning that they deleverage during crises). In contrast, the GFC was found to have a positive impact on capital structures of insurance companies (meaning, unlike banks, they leverage during crises). We find that banks and insurers have target capital structures. Banks adjust to this target at an adjustment speed of 44%, whereas insurers adjust at a lower rate of 21%. In conclusion, the paper finds both commonalities and fundamental differences between the capital structures of banks and insurers.

Keywords:

• Banks
• insurers
• capital structure
• firm level
• regulation
• South Africa

Subjects:

• G01
• G21
• G32

Public Interest Statement

The effects of the 2007–2009 global financial crises which mutated from the financial sector and afflicted many economies are still being experienced to date. Banks and insurance companies were the chief architects of this crisis. This was occasioned by the erosion of capital levels to sustain these institutions as a result of sub-prime lending. As such, it has become a policy imperative more than ever before to secure the financial sector. Although, the South African financial sector was largely insulated from the effects of the financial crisis due to the good regulatory architecture in place, it also experienced challenges due to economic downturn. Against this backdrop, this paper examines the financing policies of banks and insurance companies in order to establish the factors that drive their capital structures. This will also aid researchers to understand better what drives the capital structure policies of banks and insurers, which have remained a “grey area” in capital structure.

Acknowledgments

We would like to acknowledge the valuable comments and suggestions on how to improve this paper from the anonymous referees of the Journal of Cogent Economics and Finance as well as the participants of the 30th Australasian Finance and Banking conference held in Sydney in December 2017.

Additional information

Funding

The authors received no direct funding for this research.

Notes on contributors

Athenia Bongani Sibindi

Athenia Bongani Sibindi is a senior lecturer in finance and insurance. He holds a PhD degree in finance. Athenia also holds the fellowship of the Insurance Institute of South Africa (FIISA) and Certified Risk Management Practitioner (CRM Prac) professional designations. He currently teaches undergraduate and postgraduate student in finance and insurance. Athenia also supervises several PhD and masters’ students. His research interests include financial market stability, InsurTech, and microinsurance.

Daniel Makina

Daniel Makina is a professor in finance. He completed his PhD degree at the University of Witwatersrand in the field of financial markets. He also holds an MSc degree in financial economics from the London School of Economics. He has published widely on various aspects of financial markets, banking and migration economics. He supervised to completion many students at both PhD level and master’s degree level. His broad areas of research interests include FinTech, financial inclusion, and migration economics.