Intra-Group, Interstate Strategic Income Management for Tax, Financial Reporting, and Regulatory Purposes

In this study we examine whether banks owned by interstate multibank holding companies coordinate their security gains and losses to manage their tax, earnings, and capital management objectives. Specifically, we examine whether the realization of security gains and losses is related to the objectives of the individual bank, the consolidated group, or both. We find subsidiary banks manage their gain realizations not only to reduce their own state taxes, but also strategically to reduce their consolidated groups' tax expense. Specifically, members of consolidated banking groups shift gain recognition to lower‐taxed group members and away from higher‐taxed group members. In addition, we find evidence suggesting that banks realize security gains and losses to manage both their own and their groups' financial statement earnings.