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Journal of Financial Services Research

, Volume 54, Issue 2, pp 145–177 | Cite as

Bank Taxes, Leverage, and Risk

  • Kristoffer Milonas
Article
  • 765 Downloads

Abstract

We use staggered changes in the taxation of banks by U.S. states to show how banks adjust their capital structure in response to taxes. A one percentage point increase in the income tax rate leads to a decrease in the ratio of equity to total assets of 15 basis points. The effect is symmetric for tax increases and decreases but heterogeneous in that small and strongly capitalized banks react more. In response to taxes, banks also adjust their assets consistent with regulatory arbitrage activities intended to keep down regulatory risk measures, thereby keeping regulatory ratios at acceptable levels despite increasing leverage. Finally, higher taxes may decrease banks’ ability to survive crises.

Keywords

Banking Leverage Leverage dynamics Taxes Trade-off theory Debt bias Financial intermediation Bank capital requirements Regulatory arbitrage 

JEL classification

G 21 G 32 

Notes

Acknowledgments

I have received very helpful comments from Laurent Bach, Bo Becker, Karen Braun Muenzinger, Mike Burkart, Bob de Young, Paola Di Casola, Peter Englund, Mariassunta Giannetti, Vasso Ioannidou, Ulf von Lilienfeld-Toal, Alexander Ljungqvist, Elena Loutskina, Per Olsson, Kristian Rydqvist, Amit Seru, Spyridon Sichlimiris, Per Strömberg, Jonas Vlachos, Xiaoyun Yu as well as participants at the SSE PhD seminar, the Barcelona Graduate School of Economics Banking Summer School workshop, and the 2014 IFABS conference. I am also thankful to Kristin Lamb of the Federal Reserve and Joseph Dalaker of the U.S. Census for clarifications regarding the data sets provided by their respective organizations. Financial support from the Jan Wallander and Tom Hedelius Foundation are gratefully acknowledged. Any remaining errors are my own.

The majority of this paper was completed when I was affiliated with the Stockholm School of Economics; parts were also written when I was visiting the London School of Economics, whose hospitality I gratefully acknowledge.

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Copyright information

© Springer Science+Business Media New York 2016

Authors and Affiliations

  1. 1.Bank of England and Stockholm School of EconomicsLondonUK

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