Incidence of Bank Levy and Bank Market Power

We study the impact of banks’ market power on the incidence of a bank levy that is imposed on balance sheets. Within the framework of an oligopolistic version of the Monti-Klein model, the pass-through of a bank tax levied on loans is stronger when elasticity of credit demand is low. To test this hypothesis, we investigate the incidence of the Hungarian bank tax that was introduced in 2010 on banks’ assets. This case is well suited for our analysis because the tax rate is much higher for large banks than for small banks, which allows relying on difference-in-difference methodology. In line with model predictions, our estimations show that the tax is likely to be shifted to customers with the smallest demand elasticity, such as households. This result depends on the common trends assumption that is discussed at length.