The Effects of Tax on Bank Liability Structure

50 Pages Posted: 16 Mar 2017

See all articles by Leonardo Gambacorta

Leonardo Gambacorta

Bank for International Settlements (BIS); Centre for Economic Policy Research (CEPR)

Giacomo Ricotti

Bank of Italy

Suresh M. Sundaresan

Columbia Business School - Finance and Economics

Zhenyu Wang

Indiana University, Kelley School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: March 2017

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.

Keywords: bank liability structure, corporate tax, leverage

JEL Classification: G21, G32, G38, H25

Suggested Citation

Gambacorta, Leonardo and Ricotti, Giacomo and Sundaresan, Suresh M. and Wang, Zhenyu, The Effects of Tax on Bank Liability Structure (March 2017). CEPR Discussion Paper No. DP11893, Available at SSRN: https://ssrn.com/abstract=2934205

Leonardo Gambacorta (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Giacomo Ricotti

Bank of Italy ( email )

Via Nazionale 91
VIa Pastrengo 14
Rome, 00184
Italy

Suresh M. Sundaresan

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States
212-854-4423 (Phone)
212-316-9180 (Fax)

HOME PAGE: http://www0.gsb.columbia.edu/faculty/ssundaresan/

Zhenyu Wang

Indiana University, Kelley School of Business ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

HOME PAGE: http://www.kelley.iu.edu/Finance/Faculty/page12594.cfm?ID=37555

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