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The Taxation and Regulation of Banks

  • Michael Keen

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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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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  1. Huang, Rocco & Ratnovski, Lev, 2010. "The dark side of bank wholesale funding," Working Paper Series 1223, European Central Bank.
  2. Enrique Mendoza & Javier Bianchi, 2010. "Overborrowing, financial crises and ‘macro-prudential’ taxes," Proceedings, Federal Reserve Bank of San Francisco, issue Oct.
  3. Hans-Werner Sinn, 2001. "Risk Taking, Limited Liability and the Competition of Bank Regulators," NBER Working Papers 8669, National Bureau of Economic Research, Inc.
  4. Celine Gauthier & Alfred Lehar & Moez Souissi, 2010. "Macroprudential Regulation and Systemic Capital Requirements," Working Papers 10-4, Bank of Canada.
  5. Doina Radulescu, 2012. "The Effects of a Bonus Tax on Manager Compensation and Welfare," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 68(1), pages 1-16, March.
  6. Vidar Christiansen & Stephen Smith, 2012. "Externality-Correcting Taxes and Regulation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 114(2), pages 358-383, 06.
  7. 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.
  8. Viral V. Acharya, 2010. "Measuring systemic risk," Proceedings 1140, Federal Reserve Bank of Chicago.
  9. Korinek, Anton, 2011. "Systemic risk-taking: amplification effects, externalities, and regulatory responses," Working Paper Series 1345, European Central Bank.
  10. repec:fip:fedhpr:y:2010:i:may:p:65-71 is not listed on IDEAS
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