Taxation and Bank Liquidity Creation

43 Pages Posted: 27 Mar 2023 Last revised: 26 Mar 2024

See all articles by Allen N. Berger

Allen N. Berger

University of South Carolina - Darla Moore School of Business

Dimitris K. Chronopoulos

University of St. Andrews - School of Management

Anna L. Sobiech

University of Cologne - Center for Macroeconomic Research (CMR); University of St Andrews, School of Management

John O. S. Wilson

University of St. Andrews

Date Written: March 17, 2023

Abstract

We investigate the impact of taxes on bank liquidity creation using the Tokyo bank tax as a quasi-natural experiment. This tax is on the gross profit of large commercial banks with business operations in the Tokyo prefecture. This allows for a first-time investigation for a liquidity creation study with taxes that cover banks only. This differs from prior research using taxes that cover both banks and non-financial firms, offering better identification. We find taxes on bank profits significantly decrease liquidity creation, consistent with the empirical domination of the Risk Absorption Hypothesis over the Financial Fragility-Crowding Out Hypothesis. Banks shift from long-term loans liquefying the public and supporting the economy to short-term government securities that decrease public liquidity without economic stimulus. The tax also impairs bank capital and risk management, making the financial system riskier. Our novel findings augment and complement existing research and suggest more research and policy attention to this issue.

Keywords: Bank liquidity creation, Bank Capital, Taxes, Japanese Banks

JEL Classification: G21, G28

Suggested Citation

Berger, Allen N. and Chronopoulos, Dimitris K. and Sobiech, Anna Lucia and Wilson, John O. S., Taxation and Bank Liquidity Creation (March 17, 2023). Available at SSRN: https://ssrn.com/abstract=4392135 or http://dx.doi.org/10.2139/ssrn.4392135

Allen N. Berger

University of South Carolina - Darla Moore School of Business ( email )

1014 Greene St.
Columbia, SC 29208
United States
803-576-8440 (Phone)
803-777-6876 (Fax)

Dimitris K. Chronopoulos (Contact Author)

University of St. Andrews - School of Management ( email )

The Gateway
North Haugh
St. Andrews, Fife, Scotland KY16 9SS
United Kingdom

Anna Lucia Sobiech

University of Cologne - Center for Macroeconomic Research (CMR) ( email )

Cologne
Germany

University of St Andrews, School of Management ( email )

The Gateway
North Haugh
St Andrews, Fife KY16 9RJ
United Kingdom

John O. S. Wilson

University of St. Andrews ( email )

North St
Saint Andrews, Fife KY16 9AJ
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
181
Abstract Views
714
Rank
327,632
PlumX Metrics