Asset Allocation, Capital Structure, Theory of the Firm and Banking Performance: A Panel Analysis

Abstract

This paper attempts to propose a measure of “optimality of bank financial structure” as a proxy of regulation fairness, in terms of the “theory of the banking firm” under constraints of liquidity and capital adequacy. This has been conducted using Lagrange function to assess the optimal weights of assets that include cash, governmental investments, loans, non-governmental investments and other assets, and the optimal weights of liabilities that include deposits, equity and other liabilities. The paper argues that “optimality of bank financial structure” may affect both of “banking efficiency” and “financial stability”. This has been conducted using a sample of 15 countries, over the periods from the 2004 to 2015. Using panel analysis according to OLS and GMM techniques, results indicate that hypotheses regarding the significance of this impact could be accepted.