Debt, Taxes, and Banks

February 1, 2012

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Format: Chicago

Michael Keen, and Ruud A. de Mooij Debt, Taxes, and Banks, (USA: International Monetary Fund, 2012) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Banking, Capital adequacy requirements, Corporate income tax, Deposit insurance, Financial crises, Financial institutions, Financial regulation and supervision, Revenue administration, Stocks, Tax arrears management, Taxes

Keywords: Bank assets, Bank capital structure, Bank taxation, Capital adequacy requirements, Capital requirement, Capital structure, Capital structure choice, Corporate income tax, Corporate tax, Debt bias, Deposit insurance, Europe, Leverage, Leverage-asset ratio, Stocks, Tax arrears management, Tax rate, WP

Publication Details

Pages:

32
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2012/048
Stock No:

WPIEA2012048
ISBN:

9781463937096
ISSN:

1018-5941

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