In this article, we try to identify the link between the capital structure dynamics of banks and the European sovereign debt crisis, looking at the drivers of leverage and how their interactions with leverage changed between the periods before and during the crisis. We review the existing literature on the links between the sovereign debt crisis and banks, as well as literature discussing the changes in bank funding patterns with the view to understanding how leverage dynamics changed during the debt crisis period. We found out that although most of the variables of interest were relevant in explaining leverage over the period under study as a whole, the variables that captured macroeconomic interactions with leverage were more relevant to leverage during the crisis period than variables capturing bank specific information. Meanwhile this study showed a significant reduction of leverage during the crisis period in line with a risky environment and regulation pressures, with much of this reduction being explained by factors other than bank-specific determinants of leverage.
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