Ratio Working Papers
Does Inflation and High Taxes Increase Bank Leverage?
Abstract: Does the combination of inflation and high corporate taxes
explain the increase in bank leverage in the 20th century? Inflation
automatically increases bank debt, while high corporate taxes hinder
capital accumulation. Capital ratios therefore drop, until leverage-induced
returns are sufficient to uphold them at constant levels. This theory was
confronted with Swedish bank data 1870–2001. Bank capital ratios dropped
when inflation and corporate tax rates were high, during WWI and in
1940–1980. The theory can explain the sinking bank capital ratios during
these periods, but also their relative stability since the early 1980s.
High corporate taxes and inflation were estimated to account for half of
the drop in Swedish bank capital ratios since WWII.
Keywords: Bank leverage; Capital-asset ratio; Inflation; Corporate taxes; (follow links to similar papers)
JEL-Codes: E44; E52; G28; G32; H25; N23; N24; (follow links to similar papers)
35 pages, April 28, 2005
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