Taxation and Regulation of Banks to Manage Systemic Risk

23 Pages Posted: 22 Dec 2012 Last revised: 9 Oct 2015

See all articles by Brian Coulter

Brian Coulter

Richard Ivey School of Business

Colin Mayer

University of Oxford - Said Business School; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

John Vickers

University of Oxford - Department of Economics

Date Written: November 5, 2012

Abstract

As a form of negative externality, a natural economic response to systemic risk is to look to taxation to correct it. However, we argue in this paper that the problem of systemic risk is not a standard externality problem. First, a 'polluter pays' approach is inapplicable because the polluter is insolvent in a systemic crisis and so cannot pay. Second, we show an equivalence between taxation and regulation under a set of strict assumptions: the same economic outcome arises if banks maintain higher capital ratios or prepay into a central fund that is used to bail them out in the case of a crisis. Third, we show that any levy that is not solely in the form of pure capital is a double-edged sword. The imposition of a levy increases the per-loan funding requirement of banks and potentially the total amount of debt in the system. The levy may thereby perversely exacerbate potential systemic crises unless paid in capital, in which case it returns full circle to capital regulation.

Keywords: Taxation, Regulation, Banks, Systemic Risk, Capital Adequacy

JEL Classification: G21, G28

Suggested Citation

Coulter, Brian and Mayer, Colin and Vickers, John, Taxation and Regulation of Banks to Manage Systemic Risk (November 5, 2012). ECGI - Finance Working Paper No. 341/2013, Available at SSRN: https://ssrn.com/abstract=2192572 or http://dx.doi.org/10.2139/ssrn.2192572

Brian Coulter

Richard Ivey School of Business ( email )

London, Ontario N6A 5B8
Canada

Colin Mayer (Contact Author)

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain
+44 1865 288112 (Phone)
+44 1865 288805 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

John Vickers

University of Oxford - Department of Economics ( email )

Manor Road Building
Manor Road
Oxford, OX1 3BJ
United Kingdom

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