Eliminating the Tax Shield Through Allowance for Corporate Equity: Cross-Border Credit Supply Effects

Abstract

This paper studies how the elimination of the corporate tax bias on bank leverage through an allowance for corporate equity (ACE) affects banks' cross-border credit allocation. Using the introduction of ACE in Belgium in 2006 as an exogenous source of variation, we find that ACE leads to an overall increase in cross-border credit supply: Belgian banks contributed more within a loan facility relative to other foreign banks after the tax change, and Belgian bank-lead loans had on average 20-50 basis points lower spreads. We find an especially large impact for relatively safe borrowers, with country heterogeneity also playing some role in the strength of the cross-border credit supply effect. Finally, our results suggest a relatively large, positive, credit supply effect domestically. Our results suggest that ACE can be a useful policy tool to incentivize higher bank capitalization without hurting credit supply, but also that tax policy is a potential source of credit market spillovers.

Keywords: Cross-Border Lending, Syndicated Loans, Credit Supply, Allowance for Corporate Equity, Bank Taxation

JEL Classification: G21, G28, E51, H25