Can Taxes Tame the Banks? Evidence from the European Bank Levies

Abstract Following the 2007–2008 financial crisis, a large number of countries introduced levies on bank borrowing intended to reduce risk in the financial sector. This article studies the behavioural responses to bank levies and finds that banks exposed to levies increased their reliance on equity...

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Bibliographic Details
Published in:The Economic journal (London) 2019-11, Vol.129 (624), p.3058-3091
Main Authors: Devereux, Michael, Johannesen, Niels, Vella, John
Format: Article
Language:English
Subjects:
Assets
Banks
Behavioral economics
Behavioral responses
Borrowing
Corporate taxes
Economic crisis
Economic theory
Liability
Regulation of financial institutions
Reliance
Risk management
Risk reduction
Taxation
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Summary:Abstract Following the 2007–2008 financial crisis, a large number of countries introduced levies on bank borrowing intended to reduce risk in the financial sector. This article studies the behavioural responses to bank levies and finds that banks exposed to levies increased their reliance on equity funding, but at the same time increased the risk of their assets; banks shifted risk from the liability side of their balance sheets to the asset side, which mitigated the impact of government intervention. Our analysis also shows that any reduction in total risk was concentrated among banks that pose no or little threat to financial stability.
ISSN:0013-0133
1468-0297
DOI:10.1093/ej/uez028