Taxation and Financial Intermediation: Evidence from a Quasi-Natural Experiment

Abstract

In this study, we investigate the impact of taxes on loan supply, pricing of loans and deposits, and the monitoring efforts of banks. Using a difference-in-differences approach, which relies on the exogenous variation of tax imposed on gross profits of Japanese banks operating in Tokyo (known as the Tokyo bank tax), we find that affected banks increase both net interest margins, and net interest and fee margins. Depositors are most affected by adjustments to interest and fee rates at banks following the imposition of the tax. The imposition of the Tokyo bank tax also reduces the credit supply of affected banks relative to non-affected counterparts. Moreover, banks subject to the Tokyo bank tax appear to reduce effort devoted to the monitoring of existing borrowers.

Keywords: bank taxation, net interest margin, Japanese banks, natural experiment, monitoring

JEL Classification: G21, G28