Eliminating the Tax Shield Through Allowance for Corporate Equity: Cross-Border Credit Supply Effects

This paper studies how the elimination of the corporate tax bias on bank leverage affects banks' credit provisioning using the introduction of an allowance for corporate equity (ACE) in Belgium. We find that affected banks increased their contribution within cross-border syndicated loan facilities relative to other foreign banks, and that this effect was stronger for relatively safe borrowers; in neighboring countries; and where Belgian banks had subsidiaries. We estimate that Belgian bank-lead loans had on average 20-50 basis points lower spreads when ACE was in effect. Finally, our results suggest a relatively large, positive credit supply effect domestically. A back-of-the-envelope calculation suggests that 1 dollar of ACE tax deduction resulted in roughly 123 dollars of new loans overall.