Abstract
Regulatory bank levies set incentives for banks to reduce leverage. At the same time, corporate income taxation makes funding through debt more attractive. In this paper, we explore how regulatory levies affect bank capital structure, depending on corporate income taxation. Based on bank balance sheet data from 2006 to 2014 for a panel of EU-banks, our analysis yields three main results: The introduction of bank levies leads to lower leverage as liabilities become more expensive. This effect is weaker the more elevated corporate income taxes are. In countries charging very high corporate income taxes, the incentives of bank levies to reduce leverage turn ineffective. Thus, bank levies can counteract the debt bias of taxation only partially. JEL Classification: G21, G28, L51
Highlights
Regarding the coefficient on corporate income tax (CIT), we find that an increase in the CIT rate of one standard deviation (5.1 pp) translates into an increase in leverage of 0.6 percentage points if no levy is in place (Levy = 0)
While corporate income taxes introduce a debt bias, bank levies can have opposite effects on banks’ capital structure if, for example, equity is excluded from the tax base
Given substantial changes in the regulatory framework in Europe, including the introduction of a European bank levy to finance the Single Resolution Fund, understanding such interaction effects among regulatory and corporate income taxes is of utmost importance
Summary
Regulatory bank levies provide incentives for banks to reduce leverage, as they are typically designed as a tax on liabilities. We ask how effective regulatory bank levies are in reducing bank leverage, depending on the corporate income tax (CIT) rate. Shifting the focus from CIT to the effects of bank levies and of “Allowances for Corporate Equity” (ACE), Célérier et al (2018) find that tax reforms that make leverage more expensive increase bank capitalization, while simultaneously promoting lending. Regarding tax reforms, they exploit, on the one hand, that several countries have reduced the tax discrimination against equity by allowing for a deduction of a notional interest rate for equity through ACEs, while others have not. Customers (see e.g. Banerji et al (2017) or Capelle-Blancard and Havrylchyk (2014)) and how securitization is affected by the CIT (Gong et al, 2015)
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
