Cross-Border Banking in Europe: Implications for Financial Stability and Macroeconomic Policies

Readers may be interested in this new CEPR report (I am one of the co-authors). A VOX summary article is here. The full report is here.

2 replies on “Cross-Border Banking in Europe: Implications for Financial Stability and Macroeconomic Policies”

The comment on tax deductibility of interest is interesting but I was expecting a little more analysis. The report suggests that it is historic, but no more than than. Most western jurisdictions at this stage tax interest in the hands of a corporate, but don’t tax, or more lightly tax, dividends leaving them almost tax neutral. Removing the tax deductibility of interest would create an asymmetry here on the national level and effective double taxation which could stifle business, or more likely drive lenders offshore to jurisdictions which don’t tax interest income.

I recognise that a tax asymmetry can exist under the current system, Bank A borrows of Pension Fund B or Offshore Entity C and generates a tax deduction with no corresponding income pick-up which leaves taxpayers subsidizing the banks cost of borrowings, but Bank A borrowing off Bank D with no tax deduction in A and taxable income in D is the opposite extreme.

We can deal with asymmetries in the current system, we can (and Ireland does in certain circumstances) make tax deductibility dependent on the income being taxable either in a jurisdiction with which we share a tax treaty, or by virtue of Irish withholding tax being deducted at source on the interest payment.

We could deal with the debt to equity issue through policy makers setting caps on debt to equity for tax purposes, rather than leaving that to the market as current OECD norms are. So interest is tax deductible on gearing up to 2:1 for example, and not deductible on the excess.

The idea is certainly interesting, but I think that a more targeted approach might yield results without having the same negative impacts.

@Philip Lane:

This is an interesting document.

Regarding the bank resulution framework, I must study in more detail.
I cannot understand as a lay person why we do have deposit preference as in the US. Or why we do not have the ability to wind down a bank under common rules. As I understand it the uS has such facilities called FDIC. But why not in Ireland?

Why is this? Who is blocking this? Is this being blocked by large creditors too?

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