Deferred tax assets and banks’ risk: The role of accounting standards

Abstract

This paper investigates the relationship between deferred tax assets (DTA) and bank asset risk. Using a sample of 285 banks from 36 countries over the 2004–2024 period, we find that higher DTA levels are associated with significantly lower asset risk, consistent with the prudential constraints imposed by Basel III on the eligibility of DTA for regulatory capital. When focusing on U.S. banks, we find the exact opposite: DTA are positively associated with asset risk, reflecting the more permissive recognition criteria under the American accounting standard, and the less restrictive prudential treatment compared with IFRS jurisdictions.