Determinants of Adopting Extraordinary Bank Taxes in the Euro Area in the Post-COVID 19 era

Monetary policy tightening in the Euro Area has driven record-high bank profitability, increasing public pressure and prompting legislative proposals for bank profit levies in several Euro Area countries during 2022 and 2023. While much focus has been directed to the effects of bank levies introduced in the aftermath of the Global Financial Crisis, the motivation behind the introduction of the recent wave of extraordinary bank taxes has not been studied. This paper seeks to identify the most important characteristics of the banking, macroeconomic and governmental sectors which lead to the introduction of such taxes. Our findings show that higher banking profitability increases the likelihood of a bank tax, while greater excess reserves at the central bank reduce it, suggesting that rising profitability was not driven by remuneration on these reserves. Regarding macroeconomic conditions, higher inflation lowers the probability of implementing an extraordinary bank tax, implying that countries adopting such measures were not disproportionately impacted by the Euro Area’s inflation surge. In terms of government characteristics, we find no evidence that higher deficits or government debt made countries more likely to introduce a bank tax, suggesting revenue generation was not the primary motive. However, lower government effectiveness is linked to a higher probability of implementation.