Corporate Taxes and Securitization

48 Pages Posted: 9 Aug 2010 Last revised: 6 Feb 2014

See all articles by JoongHo Han

JoongHo Han

SKKU Business School

Kwangwoo Park

KAIST (Korea Advanced Institute of Science and Technology) - College of Business

George Pennacchi

University of Illinois

Date Written: December 1, 2013

Abstract

Most banks are subject to corporate income taxes while special purpose vehicles that hold securitized loans are corporate tax-exempt. We present a model that shows how this tax asymmetry creates an incentive for banks to sell loans. However, because moral hazard costs arise when banks inefficiently credit screen and monitor sold loans, only some banks will choose to sell particular loans. The model shows that if a bank has significant loan origination opportunities but limited deposit market power, its tendency to sell loans increases as its corporate income tax rate and its equity capital requirement rise. Empirical tests are performed using U.S. commercial banks’ originations and sales of mortgages reported on Home Mortgage Disclosure Act (HMDA) filings for the years 2001 to 2008. Consistent with the model’s predictions, banks operating in markets with relatively high lending opportunities are more likely to sell mortgages when they face higher state corporate income tax rates. An implication is that corporate taxation of bank income contributed to excessive growth in securitization. Moreover, raising banks’ required equity capital without a radical redesign of their corporate taxation could induce further tax-motivated securitization.

Keywords: Loan Sales, Securitization, Corporate Taxes

JEL Classification: G21

Suggested Citation

Han, JoongHo and Park, Kwangwoo and Pennacchi, George G., Corporate Taxes and Securitization (December 1, 2013). Journal of Finance, Forthcoming; KAIST Business School Working Paper Series No. 2010-005; KDI School of Pub Policy & Management Paper No. 10-12. Available at SSRN: https://ssrn.com/abstract=1600008 or http://dx.doi.org/10.2139/ssrn.1600008

JoongHo Han

SKKU Business School ( email )

#33519 Business Bldg.
25-2, Sungkyunkwan-ro, Jongno-gu
Seoul, N/A 110-745
Korea, Republic of (South Korea)
82-2-740-1662 (Phone)

Kwangwoo Park (Contact Author)

KAIST (Korea Advanced Institute of Science and Technology) - College of Business ( email )

85 Hoegiro
Seoul 02455
Korea, Republic of (South Korea)
82-2-958-3540 (Phone)
82-2-958-3604 (Fax)

George G. Pennacchi

University of Illinois ( email )

4041 BIF, Box 25
515 East Gregory Drive
Champaign, IL 61820
United States
217-244-0952 (Phone)

HOME PAGE: http://www.business.illinois.edu/gpennacc/

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