Do Inflation and High Taxes Increase Bank Leverage?

Per Hortlund ()
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Per Hortlund: Dept. of Economics, Stockholm School of Economics, Postal: The Ratio Institute, P.O. Box 5095, SE-102 42 Stockholm, Sweden

No 612, SSE/EFI Working Paper Series in Economics and Finance from Stockholm School of Economics

Abstract: Does the combination of inflation and high corporate taxes explain the increase in bank leverage in the 20th century? Inflation automatically increases bank debt, while high corporate taxes hinder capital accumulation. Capital ratios therefore drop, until leverage-induced returns are sufficient to uphold them at constant levels. This theory was confronted with Swedish bank data 1870–2001. Bank capital ratios dropped when inflation and corporate tax rates were high, during WWI and in 1940–1980. The theory can explain the sinking bank capital ratios during these periods, but also their relative stability since the early 1980s. High corporate taxes and inflation were estimated to account for half of the drop in Swedish bank capital ratios since WWII.

Keywords: Bank leverage; Capital-asset ratio; Inflation; Corporate taxes. (search for similar items in EconPapers)
JEL-codes: E44 E52 G28 G32 H25 N23 N24 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2005-11-17
New Economics Papers: this item is included in nep-fin, nep-fmk and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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