Taxing Bank Leverage: The Effects on Bank Portfolio Allocation
48 Pages Posted: 26 Aug 2016 Last revised: 24 Oct 2019
Date Written: May 15, 2019
We investigate whether fiscal reforms that reduce banks' incentives to leverage also affect banks' portfolio allocation. Using the introduction of an equity subsidy in Belgium in 2005, we show that treated banks shift their portfolio composition towards loans, increase lending and invest in less risky loans. Results are confirmed when exploiting the introduction of a tax on bank liabilities: overall, taxing bank leverage leads banks to refocus their activity on lending. Our results suggest that taxes can be a complementary tool to capital requirements to reduce bank leverage while maintaining credit supply.
Keywords: Credit, Bank Leverage, Taxes, Capital Regulation
JEL Classification: E51, E58, G21, G28
Suggested Citation: Suggested Citation