Nothing special about an allowance for corporate equity: Evidence from Italian banks
研究意大利降低公司股权津贴利率后，银行如何减少监管资本和风险承担，发现股权津贴的金融稳定效果依赖于持续的税收补贴，削弱后效果减弱。
This paper analyzes the impact of reduced tax incentives for equity financing on banks' regulatory capital ratios under the Basel III regime. We are particularly interested in a recent interest rate cut in the Italian corporate equity allowance, which reduces the relative tax advantage of equity financing. The results show that banks respond to this increased tax disparity by significantly reducing their regulatory capital while at the same time reducing their risk-taking. The decline in capital is more pronounced for small banks and outweighs the initial capital gains from the introduction of this tax instrument. Our results challenge the use of equity allowances, in that financial stability gains persist only as long as costly tax subsidies remain intact and diminish as the size of the subsidy is reduced. • We explore the effectiveness of an allowance for corporate equity in promoting financial stability. • Identification is based on notional interest rate cuts that partially withdraw the tax incentives for equity financing. • Banks respond to a rebound in the debt-bias by reducing their regulatory capital and risk-taking. • Consistent with dynamic trade-off theory, we find asymmetric effects in favor of notional interest rate cuts. • The results imply that equity allowances should be used as countercyclical policy measures instead of permanent instruments.