Regulatory Capital Planning and Deferred Tax Assets in a Post-Financial Crisis Environment

52 Pages Posted: 10 Oct 2019 Last revised: 9 May 2022

See all articles by Evan Eastman

Evan Eastman

Florida State University

Anne Ehinger

Florida State University

Cathryn Meegan

Florida State University

Date Written: May 9, 2022

Abstract

Insurance regulators substantially relaxed rules on deferred tax asset (DTA) inclusion in regulatory capital calculations during and following the financial crisis. Despite prior studies documenting mixed findings on whether financial institutions manage earnings through tax accounts, we find evidence life insurers use additional discretion in regulation to increase the level of DTAs admitted into regulatory capital, especially when they have greater incentives to do so. As DTAs are less liquid relative to other assets, our study raises concerns that life insurers may appear more financially stable than the reality of their underlying economic condition. We find that higher levels of DTAs are associated with greater risk-taking and higher risk of insolvency. We additionally find evidence that insurers treat illiquid DTA capital as a substitute for more liquid forms of capital. Our study has important implications for regulators considering changes to capital standards for other financial institutions.

Keywords: Deferred Tax Assets, Regulatory Capital, Insurance, Regulation

JEL Classification: G18, G22, H25, M41, M48

Suggested Citation

Eastman, Evan and Ehinger, Anne and Meegan, Cathryn, Regulatory Capital Planning and Deferred Tax Assets in a Post-Financial Crisis Environment (May 9, 2022). Available at SSRN: https://ssrn.com/abstract=3461346 or http://dx.doi.org/10.2139/ssrn.3461346

Evan Eastman (Contact Author)

Florida State University ( email )

College of Business
Tallahassee, FL 32306
United States

Anne Ehinger

Florida State University ( email )

Tallahasse, FL 32306
United States

Cathryn Meegan

Florida State University ( email )

Tallahasse, FL 32306
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
92
Abstract Views
1,026
rank
373,545
PlumX Metrics