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The effects of tax on bank liability structure

Author

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  • Gambacorta, Leonardo
  • Ricotti, Giacomo
  • Sundaresan, Suresh M
  • Wang, Zhenyu

Abstract

This paper examines the effects of taxation on the liability structure of banks. We derive testable predictions from a dynamic model of optimal bank liability structure that incorporates bank runs, regulatory closure and endogenous default. Using the supervisory data provided by the Bank of Italy, we empirically test these predictions by exploiting exogenous variations of the Italian tax rates on productive activities (IRAP) across regions and over time (especially since the global financial crisis). We show that banks endogenously respond to a reduction in tax rates by reducing nondeposit liabilities more than deposits in addition to lowering leverage. The response on the asset side depends on the financial strength of the bank: well-capitalized banks respond to a reduction in tax rates by increasing their assets, but poorly-capitalized banks respond by cleaning up their balance sheet.

Suggested Citation

  • Gambacorta, Leonardo & Ricotti, Giacomo & Sundaresan, Suresh M & Wang, Zhenyu, 2017. "The effects of tax on bank liability structure," CEPR Discussion Papers 11893, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:11893
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    References listed on IDEAS

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    Cited by:

    1. Carletti, Elena & De Marco, Filippo & Ioannidou, Vasso & Sette, Enrico, 2019. "Banks as Patient Lenders: Evidence from a Tax Reform," CEPR Discussion Papers 13722, C.E.P.R. Discussion Papers.
    2. Alessandro Zeli, 2018. "The impact of ACE on investment: the Italian case," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 35(3), pages 741-762, December.
    3. Bremus, Franziska & Schmidt, Kirsten & Tonzer, Lena, 2019. "Interactions between bank levies and corporate taxes: How is the bank leverage affected?," ESRB Working Paper Series 103, European Systemic Risk Board.
    4. Kogler, Michael, 2019. "Profit Taxation and Bank Risk Taking," Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy 203533, Verein für Socialpolitik / German Economic Association.
    5. Elena Carletti & Filippo De Marco & Vasso Ioannidou & Enrico Sette, 2019. "Banks as Patient Lenders: Evidence from a Tax Reform," BAFFI CAREFIN Working Papers 19110, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    6. Bremus, Franziska & Schmidt, Kirsten & Tonzer, Lena, 2018. "Interactions between regulatory and corporate taxes: How is bank leverage affected?," IWH Discussion Papers 16/2018, Halle Institute for Economic Research (IWH).

    More about this item

    Keywords

    bank liability structure; corporate tax; leverage;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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