The 2017 Tax Act’s Potential Impact on Bank Safety and Capitalization

16 Pages Posted: 10 Nov 2018

Date Written: August 28, 2018

Abstract

Much has been written and discussed in banking circles about recent rollbacks in prudential regulation, with some seeing the rollbacks as unsafe and others seeing them as allowing stronger financial action. Undiscussed is that the basic taxation of the corporation in the United States — and banks are taxed like ordinary corporations — has a profound impact on the level of debt and equity throughout the economy and in the banking system in particular, and that recent changes to the tax code could affect bank safety, stability, and capitalization levels.

We analyze here how and why the 2017 tax act will incentivize banks to be better capitalized, albeit modestly so. For those worried about regulatory rollbacks that decrease bank safety, this tax incentive — which has been unremarked upon and not analyzed in the academic literature, as far as we can tell — offsets some recent regulatory rollbacks. And, more important analytically and potentially for policy, we show that this tax change, if properly expanded, would have a major beneficial safety impact on banks. Properly reformed, the taxation of banks (1) can substantially improve bank safety, at a level that may well rival the improvements from post-crisis regulation and (2) can be done in a revenue-neutral way.

Keywords: Financial Crisis, Too-Big-to-Fail, Corporate Governance, Bank Regulation, Bank Capital, International Finance, Allowance for Corporate Equity, Corporate Tax, Interest Deductibility

JEL Classification: E44, G18, G21, G28, G33, G34, G38, K22, L25

Suggested Citation

Roe, Mark J. and Troege, Michael, The 2017 Tax Act’s Potential Impact on Bank Safety and Capitalization (August 28, 2018). Available at SSRN: https://ssrn.com/abstract=3268891 or http://dx.doi.org/10.2139/ssrn.3268891

Mark J. Roe (Contact Author)

Harvard Law School ( email )

Griswold 502
Cambridge, MA 02138
United States
617-495-8099 (Phone)
617-495-4299 (Fax)

Michael Troege

ESCP-Europe ( email )

79, Avenue de Republique
75543 Paris, Cedex 11, 75011
France
33/149232601 (Phone)

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