Banks, debt and risk: assessing the spillovers of corporate taxes

Serena Fatica, Wouter Heynderickx and Andrea Pagano ()
Additional contact information
Andrea Pagano: European Commission - JRC, https://joint-research-centre.ec.europa.eu/index_en

No 2018-09, JRC Working Papers in Economics and Finance from Joint Research Centre, European Commission

Abstract: Using bank balance sheet data, we find evidence that leverage and asset risk of European multinational banks in the crisis and post-crisis period is affected by corporate taxes in their host country as well as by the tax rates in all the jurisdictions where the banking group operates. Then, we evaluate the effects that establishing tax neutrality between debt and equity finance has on systemic risk. We 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. This is because national tax policies generate spillovers through cross-border bank activities and tax-driven strategic allocation of debt and asset risk across group affiliates.

Keywords: Corporate tax; Debt bias; Debt shifting; Multinational banks; Leverage (search for similar items in EconPapers)
JEL-codes: E32 F41 F44 F45 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2018-11
New Economics Papers: this item is included in nep-acc, nep-ban, nep-eec, nep-mac, nep-opm and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published by Publications office of the European Union, 2018

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https://publications.jrc.ec.europa.eu/repository/handle/JRC113592

Related works:
Journal Article: BANKS, DEBT AND RISK: ASSESSING THE SPILLOVERS OF CORPORATE TAXES (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:jrs:wpaper:201809

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