BANKS, DEBT AND RISK: ASSESSING THE SPILLOVERS OF CORPORATE TAXES

We find evidence of tax‐driven strategic allocation of debt and asset risk across group entities of European banks. We evaluate the effects that establishing tax neutrality between debt and equity finance has on systemic risk, and show that the degree of coordination in implementing the hypothetical...

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Bibliographic Details
Published in:Economic inquiry 2020-04, Vol.58 (2), p.1023-1044
Main Authors: Fatica, Serena, Heynderickx, Wouter, Pagano, Andrea
Format: Article
Language:English
Subjects:
Banking
Coordination
Corporate taxes
Debt
Elimination
Finance
Neutrality
Risk
Risk assessment
Tax reform
Taxation
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Summary:We find evidence of tax‐driven strategic allocation of debt and asset risk across group entities of European banks. We evaluate the effects that establishing tax neutrality between debt and equity finance has on systemic risk, and show that the degree of coordination in implementing the hypothetical tax reform matters. In particular, a coordinated elimination of the tax advantage of debt would significantly reduce systemic losses in the event of a severe banking crisis. By contrast, uncoordinated tax reforms are not equally beneficial precisely because national tax policies generate spillovers through cross‐border bank activities. (JEL G21, G28, H25)
ISSN:0095-2583
1465-7295
DOI:10.1111/ecin.12827