The Dark Side of the Bank Levy
IESEG Working Paper Series 2020-ACF-08
58 Pages Posted: 15 Oct 2020
Date Written: August 5, 2020
We examine the consequences of imposing a high tax levy on bank assets. Employing unique supervisory bank-level data, we exploit different channels through which the new tax may impair the stability of the banking sector. We find that following the introduction of the levy, banks increase the cost of loans and decrease their overall availability to the real economy. We also document that changes in banks’ loan portfolios are strongly related to bank-specific profitability and capital adequacy ratios. Furthermore, our evidence supports the view that banks engage in risk-shifting by increasing the risk level of their loan portfolios, attempting to recover from the lower return on equity as the tax reduces their overall profits.
Keywords: bank tax, credit growth, loan portfolios
JEL Classification: G21, H22, L13
Suggested Citation: Suggested Citation