The Interaction of Bank Regulation and Taxation

Bálint L. Horváth*

*Corresponding author for this work

Research output: Contribution to journalArticle (Academic Journal)peer-review

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. Nonfinancial 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.
Original languageEnglish
Article number101629
JournalJournal of Corporate Finance
Volume64
Early online date21 Apr 2020
DOIs
Publication statusPublished - 1 Oct 2020

Structured keywords

  • AF Banking

Keywords

  • Bank leverage
  • Bank regulation
  • Bank risk
  • Corporate taxation
  • Debt bias

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