Measuring Commercial Bank Profitability: Proceed with Caution

Networks Financial Institute Working Paper No. 2007-WP-22

24 Pages Posted: 9 Dec 2007

See all articles by R. Alton Gilbert

R. Alton Gilbert

Federal Reserve Bank of St. Louis - Research Division

David C. Wheelock

Federal Reserve Bank of St. Louis - Research Division

Date Written: October 1, 2007

Abstract

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 the Federal corporate income tax, but S-bank shareholders 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. Using estimates of the Federal corporate income tax that S-banks would pay if they were subject to the tax, this article shows that differences 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 tend to out-earn their peers even if S-bank earnings are reduced by estimated Federal taxes, and that S-banks also tend to have higher earnings rates than their peers in the year before they elect S-bank status.

Keywords: Subchapter S, return on assets, return on equity, bank earnings, corporate income tax

JEL Classification: G21, G28, H25

Suggested Citation

Gilbert, R. Alton and Wheelock, David C., Measuring Commercial Bank Profitability: Proceed with Caution (October 1, 2007). Networks Financial Institute Working Paper No. 2007-WP-22. Available at SSRN: https://ssrn.com/abstract=1060341 or http://dx.doi.org/10.2139/ssrn.1060341

R. Alton Gilbert (Contact Author)

Federal Reserve Bank of St. Louis - Research Division ( email )

411 Locust St
Saint Louis, MO 63011
United States

David C. Wheelock

Federal Reserve Bank of St. Louis - Research Division ( email )

P.O. Box 442
St. Louis, MO 63166-0442
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
753
Abstract Views
3,326
rank
33,724
PlumX Metrics