The interaction of bank regulation and taxation

Balint Horvath

Journal of Corporate Finance, 2020, vol. 64, issue C

Abstract: The tax benefit of interest deductibility encourages debt financing, but regulatory constraints create dependency between bank leverage and asset risk. Using a large international sample of banks this paper shows that banks located in high-tax countries have higher leverage and lower average asset risk-weights. This trade-off is stronger when regulation is more stringent and for banks with less capital. Non-financial firms' leverage and asset risk are positively related to tax rates, as further evidence of the regulatorily induced adjustment of portfolio risk. A difference-in-difference analysis provides support for a causal interpretation of these results. Overall, higher tax rates are positively correlated with systemic risk, suggesting that the lower asset risk does not offset the risk-inducing effect of tax rates on bank leverage.

Keywords: Bank leverage; Bank regulation; Bank risk; Corporate taxation; Debt bias (search for similar items in EconPapers)
JEL-codes: G21 G28 G32 H25 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:64:y:2020:i:c:s0929119920300730

DOI: 10.1016/j.jcorpfin.2020.101629

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