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The Taxation and Regulation of Banks

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  • Michael Keen

Abstract

The financial crisis has prompted a reconsideration of the taxation of financial institutions, with practice outstripping principle: France, Germany, the United Kingdom and several other European countries have now introduced some form of bank tax, and the U.S. administration has revived its own proposal for such a charge. This paper considers the structure, appropriate rate, and revenue yield of corrective taxation of financial institutions addressed to two externalities, consequent on excessive risk-taking, prominent in the crisis: those that arise when such institutions are simply allowed to collapse, and those that arise when, to avoid the harm this would cause, their creditors are bailed out. It also asks whether corrective taxation or a regulatory capital requirement is the better way to address these concerns. The results suggest a potential role for taxing bank borrowing, perhaps as an adjunct to minimum capital requirements, at marginal rates that rise quite sharply at low capital ratios (but are likely lower when the government cannot commit to its bailout policy), reaching levels higher than those of the bank taxes so far adopted or proposed.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/206.

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Length: 38
Date of creation: 01 Aug 2011
Date of revision:
Handle: RePEc:imf:imfwpa:11/206

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Related research

Keywords: Banks; Capital; Financial institutions; capital ratio; capital requirement; banking; bank owners; regulatory approach; bank borrowing; capital regulation; deposit insurance; bank of england; bank equity; equity capital; prudential regulation; minimum capital requirement; return on assets; banking sector; bank capital; bank failure; bank of canada; capital base; banking supervision; insurance premium; federal deposit insurance; equity finance; bank supervisors; bank subsidy; bank regulators; bank payoff; bank runs; banking systems; moral hazard; equity prices;

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References

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  1. Demirguc-Kunt, Asli & Huizinga, Harry, 2010. "Are banks too big to fail or too big to save ? International evidence from equity prices and CDS spreads," Policy Research Working Paper Series 5360, The World Bank.
  2. Doina Maria Radulescu, 2010. "The Effects of a Bonus Tax on Manager Compensation and Welfare," CESifo Working Paper Series 3030, CESifo Group Munich.
  3. Javier Bianchi & Enrique G. Mendoza, 2010. "Overborrowing, Financial Crises and 'Macro-prudential' Taxes," NBER Working Papers 16091, National Bureau of Economic Research, Inc.
  4. Hans-Werner Sinn, 2001. "Risk Taking, Limited Liability and the Competition of Bank Regulators," NBER Working Papers 8669, National Bureau of Economic Research, Inc.
  5. Vidar Christiansen & Stephen Smith, 2009. "Externality-correcting Taxes and Regulation," CESifo Working Paper Series 2793, CESifo Group Munich.
  6. Hoggarth, Glenn & Reis, Ricardo & Saporta, Victoria, 2002. "Costs of banking system instability: Some empirical evidence," Journal of Banking & Finance, Elsevier, vol. 26(5), pages 825-855, May.
  7. repec:fip:fedhpr:y:2010:i:may:p:65-71 is not listed on IDEAS
  8. Celine Gauthier & Alfred Lehar & Moez Souissi, 2010. "Macroprudential Regulation and Systemic Capital Requirements," Working Papers 10-4, Bank of Canada.
  9. Korinek, Anton, 2011. "Systemic risk-taking: amplification effects, externalities, and regulatory responses," Working Paper Series 1345, European Central Bank.
  10. Viral V. Acharya, 2010. "Measuring systemic risk," Proceedings 1140, Federal Reserve Bank of Chicago.
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Citations

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Cited by:
  1. Felix Bierbrauer, 2013. "Financial Transaction Taxes and Fire Sales," 2013 Meeting Papers 433, Society for Economic Dynamics.
  2. Felix Bierbrauer, 2012. "On the incidence of a financial transactions tax in a model with fire sales," Working Paper Series in Economics 55, University of Cologne, Department of Economics.
  3. Felix Bierbrauer, 2012. "On the Incidence of a Financial Transactions Tax in a Model with Fire Sales," CESifo Working Paper Series 3870, CESifo Group Munich.
  4. Michael P. Devereux & Niels Johannesen & John Vella, 2013. "Can taxes tame the banks? Evidence from European bank levies," EPRU Working Paper Series 1315, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  5. Tri Vi Dang & Florian Morath, 2013. "The Taxation of Bilateral Trade with Endogenous Information," Working Papers tax-mpg-rps-2013-07, Max Planck Institute for Tax Law and Public Finance.

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