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Can taxes tame the banks? Evidence from European bank levies

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  • Michael P. Devereux

    (Centre for Business Taxation, Oxford University)

  • Niels Johannesen

    (Copenhagen University)

  • John Vella

    (Centre for Business Taxation, Oxford University)

Abstract

In the wake of the ?nancial crisis, a number of countries have introduced levies on bank borrowing with the aim of reducing risk in the ?nancial sector. This paper studies the behavioral responses to the bank levies and evaluates the policy. We ?nd that the levies induced banks to borrow less but also to hold more risky assets. The reduction in funding risk clearly dominates for banks with high capital ratios but is exactly o¤set by the increase in portfolio risk for banks with low capital ratios. This suggests that while the levies have reduced the total risk of relatively safe banks, they have done nothing to curb the risk of relatively risky banks, which presumably pose the greatest threat to ?nancial stability.

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Bibliographic Info

Paper provided by Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics in its series EPRU Working Paper Series with number 1315.

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Length: 38 pages
Date of creation: 09 Dec 2013
Date of revision:
Handle: RePEc:kud:epruwp:1315

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  1. Gary Gorton & Andrew Metrick, 2009. "Securitized Banking and the Run on Repo," Yale School of Management Working Papers amz2358, Yale School of Management, revised 01 Sep 2009.
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As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Taxing banks does not tame them
    by Economic Logician in Economic Logic on 2014-01-22 15:00:00
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Cited by:
  1. Heshmati, Almas & Kim, Jungsuk, 2014. "A Survey of the Role of Fiscal Policy in Addressing Income Inequality, Poverty Reduction and Inclusive Growth," IZA Discussion Papers 8119, Institute for the Study of Labor (IZA).

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