Research

Working Papers

Regulatory Capital, Business Growth, and Investment Risk: Evidence from Life Insurance Companies

This paper examines how capital requirements affect life insurance companies’ business growth and investment risk taking. I show through a simple model that capital requirements are negatively (positively) associated with life insurers’ equilibrium business scale (average portfolio investment risk). Using staggered changes in U.S. state laws that enable life insurers to raise capital more easily, I find evidence consistent with the model’s prediction: life insurers respond to these law changes by accelerating their insurance underwriting growth and reducing their allocation to risky investments on average. The effect is more pronounced for insurers that are less financially competitive.

Bank Income Tax, Lending Decisions, and Deposit Competition (with Erica X. Jiang) (draft available upon request)

We demonstrate the impact of income tax on commercial banks’ lending decisions. We exploit staggered changes in corporate income taxes across U.S. states and show that the share of jumbo loans in banks’ mortgage origination responds negatively to changes in tax rates. In the cross section, the magnitude of this response is negatively associated with the intensity of deposit competition banks are faced with. In addition, although tax increases (cuts) exert no effect on the amount of conforming loan origination, they lead to an increase (decrease) in the average interest rate spread of such loans over the corresponding prime mortgage benchmark rate. This effect appears to be driven by banks in more competitive deposit markets. The findings suggest that income tax directly influences bank lending decisions through the funding cost channel.