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Corporate Taxes and Securitization
Author(s) -
HAN JOONGHO,
PARK KWANGWOO,
PENNACCHI GEORGE
Publication year - 2015
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12157
Subject(s) - securitization , business , loan , loan sale , financial system , equity (law) , monetary economics , incentive , income tax , economics , finance , cross collateralization , non performing loan , market economy , political science , law
Most banks pay corporate income taxes, but securitization vehicles do not. Our model shows that, when a bank faces strong loan demand but limited deposit market power, this tax asymmetry creates an incentive to sell loans despite less‐efficient screening and monitoring of sold loans. Moreover, loan‐selling increases as a bank's corporate income tax rate and capital requirement rise. Our empirical tests show that U.S. commercial banks sell more of their mortgages when they operate in states that impose higher corporate income taxes. A policy implication is that tax‐induced loan‐selling will rise if banks’ required equity capital increases.