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

Abstract

In this paper we examine how the realizations of securities gains and losses by banks owned by an interstate multibank holding company are related to the tax, earnings, and capital management objectives of the consolidated group and of the individual subsidiaries. We find that while subsidiary banks manage their gain realizations to reduce their own state tax, they also behave strategically with respect to their tax cost in relation to other members of their consolidated group so as to reduce the groups'state tax expense. We find evidence suggesting that banks also use the realization of securities gains and losses to manage their subsidiaries' earnings, and that they coordinate their gains and losses to manage the earnings of the group.

JEL Classification: G21, H25, M41, M43