Bank leverage and the tax advantage of debt

Brown Bag Seminar
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Speaker
Date
Thursday 25 Apr 2024, 12:00 - 13:00
Type
Seminar
Room
Kitchen/Lounge E1
Building
E Building
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cropped view of man getting US dollars out of a wallet

Does the preferential tax treatment of debt vis-à-vis equity cause banks to increase their leverage? We compile a novel dataset that allows us to study the evolution of the tax advantage of debt in advanced economies from 1870 to 2017. 

(joint work with Jose Castillo and Casper de Vries)

Based on nearly the entirety of advanced-economy tax shield changes since the nineteenth century we show that a 1 percentage point increase (ppt) in the tax shield elicits state-dependent capital ratio responses in the -0.2 to -0.6 ppt range. This implies that the preferential tax treatment of debt was an important contributor to the increase in bank leverage over the twentieth century.

Registration

To participate, please send an email to: ae-secr@ese.eur.nl

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