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 affects banks' credit provisioning using a quasi‐natural experiment, the introduction of an allowance for corporate equity (ACE) in Belgium. We find that affected banks increased their contribution within cross‐border syndicated loan facilities relative to other foreign banks, and that this effect was stronger for relatively safe borrowers. We estimate that Belgian bank‐led loans had on average 20–50 basis points lower spreads when ACE was in effect. Finally, our results suggest a relatively large, positive credit supply effect domestically.

Taxing banks leverage and syndicated lending: A cross-country comparison

“…Table 7 displays an annual change in participation rising by 0.006 percentage points, a sizeable increase with a semi-elasticity of 13.4 percent from its unconditional standard deviation (equal to 0.0448 percent). Our conclusions remain strictly identical in all the different specifications highlighting the positive impact of the tax levy on banks lending behavior in line with the literature (Celerier et al, 2019;and Biswas et al, 2022). It is interesting to see that treated banks tend to significantly increase their The dependent variable is the annual growth rate of bank 𝑏 participation in syndicated loans.…”

“…At the international level, Celerier et al (2019) and Biswas et al (2022) suggest an increase in cross-border lending by taxed banks relative to non-impacted banks. Importantly, the Belgian ACE supports international lending without negative spillovers for domestic lending or firms demand for credit (Biswas et al, 2022).…”

“…At the international level, Celerier et al (2019) and Biswas et al (2022) suggest an increase in cross-border lending by taxed banks relative to non-impacted banks. Importantly, the Belgian ACE supports international lending without negative spillovers for domestic lending or firms demand for credit (Biswas et al, 2022). However, in the United States, Smolyansky (2019) demonstrates that banks experiencing taxcut tend to reallocate small-business lending to states with lower tax rates, creating credit outflows for the other states.…”

“…In contrast to Buch et al (2016) and Capelle-Blancard and Havrylchyk (2017), we enlarge the sample of countries under study by considering the syndicated loan market, a highly competitive international loan market. While Haskamp (2018) discusses the regional competition and Biswas et al (2022) the country specific Belgium Allowance for Common Equity (ACE), our analysis allows us to focus on international competitors for different geographic area. To the best of our knowledge, ours is the first project to investigate the impact of these tax levies on the syndicated loan market and to consider an international dataset rather than a country specific loan market, allowing us to simultaneously analyze the implementation of such policy in all European countries.…”

The real effects of bank taxation: Evidence for corporate financing and investment

“…A more recent strand of the literature focuses on the link between taxes and bank credit supply. Célérier, Kick and Ongena (2020) and Biswas, Horváth and Zhai (2019) trace out bank reactions to the allowance for corporate equity (ACE) tax introduced in Belgium, which instituted a symmetric tax treatment of equity and debt. The imposition of the ACE tax led to an expansion in equity capital as well as an increase in credit supply.…”