U.S. BANKS Tax law: big paper losses, long-term gains
Big U.S. banks have been reporting billions of dollars in paper losses this month as they are forced to come into compliance with the new tax law. And while the losses are massive, they were largely expected, and bank executives say the new tax law will be good for banks as well as the economy in the long run.
The biggest loser so far has been Citigroup, which reported Tuesday an $18 billion loss largely due to the tax law. The actual write-downs were even larger than that, more than $22 billion just in the quarter. It was one of the largest quarterly losses in Citi’s history.
The charges that these banks are taking fall into two categories.
The lion’s share is tied to what’s known as deferred tax assets. During the financial crisis nearly a decade ago, banks racked up billions of dollars in losses from soured mortgages and other toxic assets. These losses, under U.S. tax law, can be converted into credits to be used to lower their tax bills in the future.
Citigroup, JPMorgan and other banks had assigned a value to these assets when the top U.S. corporate income tax rate was 35 percent. But the Trump tax law lowered the top rate to 21 percent this year, the value of those deferred tax assets had to be adjusted.
The other component of the bank’s write-downs this week is the repatriation of foreign earnings. Just like Apple, which has billions of dollars of its profits sitting in overseas subsidiaries, some of the major Wall Street banks also have foreign subsidiaries where they have been holding profits abroad in hopes of getting a better tax rate on those earnings.