Measuring commercial bank profitability: proceed with caution
The federal tax code creates challenges for comparing the profit rates of different banks on a consistent basis. The earnings of banks that elect to operate under subchapter S of the federal tax code are not subject to federal corporate income tax, but shareholders of these "S-banks" are taxed on their pro rata share of the entire earnings of the bank. The number of banks electing subchapter S tax treatment has increased rapidly, especially among small banks. The authors use estimates of the federal corporate income tax that S-banks would pay if they were subject to the tax to show that the difference in the tax treatment of S-banks and other banks has a large impact on measures of U.S. banking system profitability. Further, the article shows that adjustment of S-bank earnings by estimates of federal income taxes to make them comparable with the earnings of other banks can markedly affect conclusions of studies that use net income as a measure of performance. Finally, the article shows that S-banks (even after their earnings are reduced by estimated federal taxes) tend to out-earn their peers; S-banks also tend to have higher earnings rates than their peers in the year before they elect S-bank status.
Volume (Year): (2007)
Issue (Month): Nov ()
|Contact details of provider:|| Postal: |
Web page: http://www.stlouisfed.org/
More information through EDIRC
|Order Information:|| Web: http://www.stls.frb.org/research/order/pubform.html Email: |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Robert DeYoung & William C. Hunter & Gregory F. Udell, 2003.
"The past, present, and probable future for community banks,"
Working Paper Series
WP-03-14, Federal Reserve Bank of Chicago.
- Robert DeYoung & William Hunter & Gregory Udell, 2004. "The Past, Present, and Probable Future for Community Banks," Journal of Financial Services Research, Springer, vol. 25(2), pages 85-133, April.
- William Keeton, 2003. "The role of community banks in the U.S. economy," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 15-43.
- James Harvey & Jane Padget, 2000. "Subchapter S : a new tool for enhancing the value of community banks," Financial Industry Perspectives, Federal Reserve Bank of Kansas City, issue Dec, pages 17-32.
- Scott E. Hein & Timothy W. Koch & S. Scott MacDonald, 2005. "On the uniqueness of community banks," Economic Review, Federal Reserve Bank of Atlanta, issue Q 1, pages 15-36.
When requesting a correction, please mention this item's handle: RePEc:fip:fedlrv:y:2007:i:nov:p:515-532:n:v.89no.6. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Anna Xiao)
If references are entirely missing, you can add them using this form.