Banks, Debt and Risk: Assessing the Spillovers of Corporate Taxes

Abstract

We find evidence of tax‐driven strategic allocation of debt and asset risk across group entities of European banks. We evaluate the effects that establishing tax neutrality between debt and equity finance has on systemic risk, and show that the degree of coordination in implementing the hypothetical tax reform matters. In particular, a coordinated elimination of the tax advantage of debt would significantly reduce systemic losses in the event of a severe banking crisis. By contrast, uncoordinated tax reforms are not equally beneficial precisely because national tax policies generate spillovers through cross‐border bank activities. (JEL G21, G28, H25)

Optimal Prudential Regulation of the Bank Risk-Taking

“…The concept of systemic risk has captured the minds of researchers (Carey & Gordy, 2003;Acharya, 2009;Mayordomo, Rodriguez-Moreno, & Pena, 2014;Li & Marin, 2014;Tente, von Westernhagen, & Slopek, 2019;Duprey & Ueberfeldt, 2020;Meuleman & Vennet, 2020;Fatica, Heynderickx, & Andrea, 2020) for the last twenty years. They offer different approaches to quantify it.…”

Introduction to the Symposium on Contemporary Banking Research: The Use of Fixed Effects to Disentangle Loan Demand From Loan Supply

“…Several other papers use fixed effects that account for (un)observable determinants affecting the main relationship under analysis in a cross‐country bank‐level empirical setting. Fatica, Heynderickx, and Pagano () apply bank‐group, year and country‐year fixed effects in their assessment of the impact of corporate tax reforms on debt and equity choices. Qi, Kleimeier, and Sander () use country‐pair and year fixed effects when estimating the effect of deposit insurance on bilateral cross‐border deposits.…”