Eliminating the Tax Shield through Allowance for Corporate Equity: Cross‐Border Credit Supply Effects

Abstract

AbstractThis paper studies how the elimination of the corporate tax bias on bank leverage affects banks' credit provisioning using a quasi‐natural experiment, the introduction of an allowance for corporate equity (ACE) in Belgium. We find that affected banks increased their contribution within cross‐border syndicated loan facilities relative to other foreign banks, and that this effect was stronger for relatively safe borrowers. We estimate that Belgian bank‐led loans had on average 20–50 basis points lower spreads when ACE was in effect. Finally, our results suggest a relatively large, positive credit supply effect domestically.