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Do Inflation and High Taxes Increase Bank Leverage?

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  • Hortlund, Per

    (Dept. of Economics, Stockholm School of Economics)

Abstract

Does the combination of inflation and high corporate taxes explain the increase in bank leverage in the 20th century? Inflation automatically increases bank debt, while high corporate taxes hinder capital accumulation. Capital ratios therefore drop, until leverage-induced returns are sufficient to uphold them at constant levels. This theory was confronted with Swedish bank data 1870–2001. Bank capital ratios dropped when inflation and corporate tax rates were high, during WWI and in 1940–1980. The theory can explain the sinking bank capital ratios during these periods, but also their relative stability since the early 1980s. High corporate taxes and inflation were estimated to account for half of the drop in Swedish bank capital ratios since WWII.

Suggested Citation

  • Hortlund, Per, 2005. "Do Inflation and High Taxes Increase Bank Leverage?," SSE/EFI Working Paper Series in Economics and Finance 612, Stockholm School of Economics.
    • Handle: RePEc:hhs:hastef:0612
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    References listed on IDEAS

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    1. Englund, Peter, 1999. "The Swedish Banking Crisis: Roots and Consequences," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 15(3), pages 80-97, Autumn.
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    Cited by:

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    2. Mili, Mehdi & Sahut, Jean-Michel & Trimeche, Hatem & Teulon, Frédéric, 2017. "Determinants of the capital adequacy ratio of foreign banks’ subsidiaries: The role of interbank market and regulation," Research in International Business and Finance, Elsevier, vol. 42(C), pages 442-453.
    3. Paweł Węgrzyn, 2022. "Determinanty finansowania obligacjami banków w Polsce," Bank i Kredyt, Narodowy Bank Polski, vol. 53(4), pages 399-420.
    4. Klaus Schaeck & Martin Cihák, 2012. "Banking Competition and Capital Ratios," European Financial Management, European Financial Management Association, vol. 18(5), pages 836-866, November.

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    More about this item

    Keywords

    Bank leverage; Capital-asset ratio; Inflation; Corporate taxes.;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • N23 - Economic History - - Financial Markets and Institutions - - - Europe: Pre-1913
    • N24 - Economic History - - Financial Markets and Institutions - - - Europe: 1913-

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