Deferred Tax Assests and Bank Regulatory Capital

J. Gallemore

Research output: Working paperDiscussion paperOther research output

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Abstract

Abstract: In this study, I examine three issues: (1) whether the probability of bank failure is increasing in the proportion of regulatory capital composed of deferred tax assets (DTA), (2) whether market participants incorporate the increased failure risk associated with the DTA component of capital into their assessments of credit risk, and (3) whether the rules governing the inclusion of DTA into capital encourage risk-taking behavior. Using a sample of U.S. commercial banks, I find that banks that had a larger proportion of capital composed of DTA at the beginning of the recent recession were more likely to fail during the recession, even after controlling for other determinants of bank failure. Furthermore, using a sample of U.S. bank holding companies, I find that banks with a larger percentage of regulatory capital composed of DTA have lower credit ratings and higher bond spreads, with the effect varying negatively with expected profitability. Finally, I find evidence that poorly capitalized banks increased risk-taking to count more DTA towards capital requirements. These findings contribute to the ongoing debate regarding the inclusion of DTA in regulatory capital, as well as the literatures examining the valuation of DTA and the association between regulatory capital and credit risk.
Original languageEnglish
Place of PublicationTilburg
PublisherEBC
Number of pages57
Volume2012-022
Publication statusPublished - 2012

Publication series

NameEBC Discussion Paper
Volume2012-022

Fingerprint

Regulatory capital
Assets
Deferred taxes
Inclusion
Recession
Bank failure
Proportion
Credit risk
Bond spreads
Credit rating
Bank holding companies
Capital requirements
Profitability
Risk-taking behavior
Commercial banks
Bank risk taking

Keywords

  • deferred tax assets
  • regulatory capital
  • banks
  • credit risk
  • bond spreads
  • credit ratings
  • bankruptcy
  • risk-taking

Cite this

Gallemore, J. (2012). Deferred Tax Assests and Bank Regulatory Capital. (EBC Discussion Paper; Vol. 2012-022). Tilburg: EBC.
Gallemore, J. / Deferred Tax Assests and Bank Regulatory Capital. Tilburg : EBC, 2012. (EBC Discussion Paper).
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Gallemore, J 2012 'Deferred Tax Assests and Bank Regulatory Capital' EBC Discussion Paper, vol. 2012-022, EBC, Tilburg.

Deferred Tax Assests and Bank Regulatory Capital. / Gallemore, J.

Tilburg : EBC, 2012. (EBC Discussion Paper; Vol. 2012-022).

Research output: Working paperDiscussion paperOther research output

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AB - Abstract: In this study, I examine three issues: (1) whether the probability of bank failure is increasing in the proportion of regulatory capital composed of deferred tax assets (DTA), (2) whether market participants incorporate the increased failure risk associated with the DTA component of capital into their assessments of credit risk, and (3) whether the rules governing the inclusion of DTA into capital encourage risk-taking behavior. Using a sample of U.S. commercial banks, I find that banks that had a larger proportion of capital composed of DTA at the beginning of the recent recession were more likely to fail during the recession, even after controlling for other determinants of bank failure. Furthermore, using a sample of U.S. bank holding companies, I find that banks with a larger percentage of regulatory capital composed of DTA have lower credit ratings and higher bond spreads, with the effect varying negatively with expected profitability. Finally, I find evidence that poorly capitalized banks increased risk-taking to count more DTA towards capital requirements. These findings contribute to the ongoing debate regarding the inclusion of DTA in regulatory capital, as well as the literatures examining the valuation of DTA and the association between regulatory capital and credit risk.

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KW - credit risk

KW - bond spreads

KW - credit ratings

KW - bankruptcy

KW - risk-taking

M3 - Discussion paper

VL - 2012-022

T3 - EBC Discussion Paper

BT - Deferred Tax Assests and Bank Regulatory Capital

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CY - Tilburg

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Gallemore J. Deferred Tax Assests and Bank Regulatory Capital. Tilburg: EBC. 2012. (EBC Discussion Paper).