EBA欧洲银行-Paper-Session-5.Thomas-Kick_40页_484kb

Summary of "Changes in the Cost of Bank Equity and the Supply of Bank Credit"

Core Content

This paper investigates how changes in the cost of equity, through the introduction of the Allowance for Corporate Equity (ACE), affect bank lending behavior. The study focuses on the impact of ACE reforms in Italy (2000) and Belgium (2006) on the lending activities of banks in Germany, using loan-level data from the German Credit Register. The main goal is to determine whether a decrease in the fiscal cost of equity increases bank lending and, if so, which mechanisms are responsible for this effect.

Main Viewpoints

• Tax Reform and Equity Cost: The ACE reforms aim to reduce the tax burden on equity by allowing firms and banks to deduct a notional interest on equity from taxable income, thereby creating a symmetric tax treatment between debt and equity.

• Mechanisms of Impact: The study identifies three potential mechanisms through which a decrease in the cost of equity may influence bank lending:

  1. Income Effect: Lower equity cost increases bank income, which can be directly used for lending.
  2. Cost of Funds Effect: Lower equity cost reduces the overall cost of capital, leading to lower lending rates and potentially increased lending.
  3. Capital Structure Effect: A lower cost of equity encourages banks to hold more equity, reducing leverage and easing regulatory constraints, which allows for more lending.

• Empirical Strategy: The authors use a difference-in-differences (DiD) approach to compare the lending behavior of treated banks (those affected by the ACE reforms) with control banks (those not affected). They focus on loan-level data and use firm fixed effects to control for demand-side changes.

• Impact on Lending: The study finds that:

  • A decrease in the cost of equity leads to an increase in bank lending to German firms.
  • The effect is significant and large, with Italian and Belgian banks increasing lending to German firms by more than 40% on the intensive margin.
  • On the extensive margin, the increase in the probability of granting a new loan is less significant, but still reaches up to 6 percentage points for Belgian banks.
  • The effect is reversed when the cost of equity increases, indicating a causal relationship.

Key Information

ACE Reforms Overview

• Italy (2000): Introduced a partial ACE known as the Dual Income Tax, which reduced the tax rate on equity returns from 37% to 19%. This was later phased out, with the notional interest rate decreasing to 3.5% and the corporate tax rate dropping to 33%.
• Belgium (2006): Introduced a full ACE allowing all corporations, including financial institutions, to deduct a notional interest on equity. The notional rate was capped at 6.5% until 2011 and then reduced to 3%.
• The reforms were designed to reduce the tax advantage of debt, which is a major driver of financial leverage in firms and banks.

Data and Methodology

• Data Sources:
  • German Credit Register: Contains loan-level data from banks headquartered in Germany and other countries.
  • Bankscope Database: Provides bank-level data including profitability, business model, size, and risk.
• Sample:
  • Includes 6 Italian banks, 4 Belgian banks, and 3,525 German banks.
  • Focuses on firms borrowing from multiple banks, ensuring a robust control for credit demand.
  • Loan amount threshold: 1.5 million euros, which is used to identify eligible loan exposures.
• Identification Strategy:

  • Propensity score matching is used to construct a control group of European banks based on pre-reform characteristics.

  • The DiD model is estimated using the following equation:

    $$
    \Delta \log L _ {b, f} = \alpha \text {T r e a t e d} _ {b, f} + \beta X _ {f} + \gamma Y _ {b} + \epsilon_ {b, f}
    $$

  • The model accounts for bank and firm fixed effects, as well as pre- and post-shock periods.

Findings

• Equity Ratio Changes:
  • Italian banks increased their equity ratio by 6% after the introduction of the ACE.
  • Belgian banks increased their equity ratio by over 15%.
  • These changes are reversed when the reforms are phased out, suggesting a causal effect of the tax reforms on capital structure.
• Lending Behavior:
  • Intensive Margin: Treated banks increased lending to German firms by more than 40%.
  • Extensive Margin: The probability of new loan granting increased by up to 6 percentage points for Belgian banks.
  • The cost of funds effect and capital structure effect are likely more significant than the income effect.
• Robustness Checks:
  • The study also examines the effect of Dynamic Provisioning in Spain, showing that higher capital requirements reduce lending.
  • The results support the identification strategy and provide clean evidence on the impact of regulation on bank lending.

Conclusion

The paper contributes to the literature on bank capital regulation and bank lending by showing that reducing the cost of equity can lead to increased bank lending. It also provides new evidence on the effect of tax reforms on bank capital structure, and highlights the importance of cross-border banking and regulatory endogeneity in understanding the impact of financial regulations. The findings support the idea that tax policy can be an effective tool to influence bank behavior and financial stability.