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Liability taxes, risk, and the cost of banking crises

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  • Bellucci, Andrea
  • Fatica, Serena
  • Heynderickx, Wouter
  • Kvedaras, Virmantas
  • Pagano, Andrea

Abstract

This study investigates the effects on risk and financial stability of the taxes on bank liabilities introduced across European countries after the global financial crisis. Using a difference-in-differences setup, we show that banks responded to the implementation of liability taxes by reducing their interbank exposure, and by increasing both equity, at least in the short term, and the risk weight of their assets. When we consider these adjustments in a microsimulation model for bank portfolio losses, we find that liability taxes reduce risk in the banking sector and could therefore decrease the cost of crises.

Suggested Citation

  • Bellucci, Andrea & Fatica, Serena & Heynderickx, Wouter & Kvedaras, Virmantas & Pagano, Andrea, 2023. "Liability taxes, risk, and the cost of banking crises," Journal of Corporate Finance, Elsevier, vol. 79(C).
    • Handle: RePEc:eee:corfin:v:79:y:2023:i:c:s0929119923000366
    DOI: 10.1016/j.jcorpfin.2023.102387
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    Keywords

    Financial sector taxation; Banks; Capital structure; Asset risk;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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