Corporate taxes and securitization

Most banks are subject to corporate income taxes while special purpose vehicles that hold securitized loans are corporate tax-exempt. We present a model that shows how this tax asymmetry creates an incentive for banks to sell loans. However, because moral hazard costs arise when banks inefficiently credit screen and monitor sold loans, only some banks will choose to sell particular loans. The model shows that if a bank has significant loan origination opportunities but limited deposit market power, its tendency to sell loans increases as its corporate income tax rate and its equity capital requirement rise. Empirical tests are performed using U.S. commercial banks' originations and sales of mortgages reported on Home Mortgage Disclosure Act (HMDA) filings for the years 2001 to 2008. Consistent with the model's predictions, banks operating in markets with relatively high lending opportunities are more likely to sell mortgages when they face higher state corporate income tax rates. An implication is that corporate taxation of bank income contributed to excessive growth in securitization. Moreover, raising banks' required equity capital without a radical redesign of their corporate taxation could induce further tax-motivated securitization