Debt, Taxes, and Banks

Abstract

Understanding the impact of the asymmetric tax treatment of debt and equity on the capital structures of financial institutions is critical to shaping and assessing responses to the problem of excessive leverage that underlay the 2009 financial crisis-but there is no empirical evidence to draw on. Guided by a simple model of banks' financing decisions in the presence of both regulatory constraints and tax asymmetries, this paper explores the impact of corporate tax bias on bank leverage, the use of hybrid instruments and regulatory capital ratios for a panel of over 14,000 commercial banks in 82 countries over nine years. On average, the sensitivity of banks' debt choices proves very similar to that of non-financial firms, consistent with rough offsetting of two opposing effects suggested by the theory. As the model predicts, somewhat counter-intuitively, the impact of tax on hybrids is generally weak or insignificant. Responsiveness to taxation varies significantly across banks, however: those holding smaller equity buffers, and larger banks, are noticeably less sensitive to tax.

Profit-Shifting Activities in the Mining Sector: Evidence from the Czech Republic

“…For instance, Feld et al (2013) found evidence of 0.27 percentage point by employing a meta-analysis of 48 existing studies on the relationship that exist between capital structure of firms and taxation. Other empirical evidence which are consistent with our results include that of Keen and de Mooij (2012) and Heckemeyer and de Mooij (2013) who all found a magnitude of evidence of tax effect on capital structure.…”

An Overview of Macroprudential Policy Tools

“…Tax policies can contribute to systemic risk when they encourage leverage, as when interest payments are tax deductable, or affect asset prices (see De Mooij, 2011, Keen andDe Mooij, 2012). Macroprudential authorities have therefore an interest in the correction of such biases.…”

Taxes, Banks, and Financial Stability

“…In addition, the IMF and others have discussed more radical reforms to reduce the incentives for leverage of financial and non-financial firms by abolishing the deductibility of interest, or, alternatively, allowing the deductibility of a risk free return on equity (IMF, 2010, Keen and de Mooij, 2012, Gu et al, 2012. These changes would have significant consequences not only for financial institutions but also for all non-financial firms.…”