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Financial Sector Debt Bias

Oana Luca and Alexander Tieman

No 16/217, IMF Working Papers from International Monetary Fund

Abstract: Most tax systems create a tax bias toward debt finance. Such debt bias increases leverage and may negatively affect financial stability. This paper models and estimates debt bias in the financial sector, and present novel estimates for investment banks and non-bank financial intermediaries such as finance and insurance companies. We find debt bias to be pervasive, explaining as much as 10 percent of total leverage for regular banks and 20 percent for investment banks, with the effects most pronounced before the global financial crisis. Going forward, debt bias is likely to once again gain prominence as a key driver of leverage decisions, underscoring the importance of policy reform at this juncture.

Keywords: Banks; Financial stability; Financial sector; Tax bias, Debt bias, Leverage, Non-Banks, Oil prices, equity prices, dividends, economic growth, oil supply, global oil markets, international business cycle, Business Taxes and Subsidies (search for similar items in EconPapers)
Date: 2016-11-10
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Handle: RePEc:imf:imfwpa:16/217