Financial Sector Debt Bias
IMF Working Papers, November 10, 2016
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Bibliographic details
- Authors: Oana Luca, Alexander F. Tieman
- Published: November 10, 2016
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475552805.001
Overview
- Title: Financial Sector Debt Bias
- Authors: Oana Luca, Alexander F. Tieman
- Publication: IMF Working Papers, Working Paper No. 2016/217
- Date: November 10, 2016
- Summary: Most tax systems create a tax bias toward debt finance. Such debt bias increases leverage and may negatively affect financial stability. This paper models and estimates debt bias in the financial sector, and present novel estimates for investment banks and non-bank financial intermediaries such as finance and insurance companies.
Key Findings
- Debt bias is pervasive across the financial sector.
- Debt bias explains as much as 10 percent of total leverage for regular banks.
- Debt bias explains as much as 20 percent of total leverage for investment banks.
- The effects of debt bias were most pronounced before the global financial crisis.
- Going forward, debt bias is likely to once again gain prominence as a key driver of leverage decisions, underscoring the importance of policy reform at this juncture.
Policy Implications and Recommendations
- Addressing tax-induced debt bias is important for financial stability because debt bias increases leverage.
- Policy reform is underscored as timely given the likelihood that debt bias will regain prominence as a driver of leverage decisions.