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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.

Suggested Citation

  • Michael Keen, 2011. "The Taxation and Regulation of Banks," IMF Working Papers 11/206, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:11/206

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    1. repec:fip:fedhpr:y:2010:i:may:p:65-71 is not listed on IDEAS
    2. Huang, Rocco & Ratnovski, Lev, 2011. "The dark side of bank wholesale funding," Journal of Financial Intermediation, Elsevier, vol. 20(2), pages 248-263, April.
    3. Enrique G. Mendoza & Javier Bianchi, 2010. "Overborrowing, financial crises and ‘macro-prudential’ taxes," Proceedings, Federal Reserve Bank of San Francisco, issue Oct.
    4. Anton Korinek, 2011. "Systemic Risk-Taking: Amplification Effects, Externalities, and Regulatory Responses," NFI Working Papers 2011-WP-13, Indiana State University, Scott College of Business, Networks Financial Institute.
    5. 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.
    6. Vidar Christiansen & Stephen Smith, 2012. "Externality-Correcting Taxes and Regulation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 114(2), pages 358-383, June.
    7. Celine Gauthier & Alfred Lehar & Moez Souissi, 2010. "Macroprudential Regulation and Systemic Capital Requirements," Staff Working Papers 10-4, Bank of Canada.
    8. 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.
    9. Hans-Werner Sinn, 2002. "Risktaking, Limited Liability, and the Competition of Bank Regulators," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 59(3), pages 305-305, August.
    10. Michael Keen, 2011. "Rethinking the Taxation of the Financial Sector ," CESifo Economic Studies, CESifo, vol. 57(1), pages 1-24, March.
    11. Wolf Wagner, 2010. "In the Quest of Systemic Externalities: A Review of the Literature ," CESifo Economic Studies, CESifo, vol. 56(1), pages 96-111, March.
    12. Viral V. Acharya, 2010. "Measuring systemic risk," Proceedings 1140, Federal Reserve Bank of Chicago.
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    Cited by:

    1. Julia Merz & Michael Overesch & Georg Wamser, 2015. "Tax vs. Regulation Policy and the Location of Financial Sector FDI," CESifo Working Paper Series 5500, CESifo Group Munich.
    2. repec:eee:finsta:v:31:y:2017:i:c:p:81-92 is not listed on IDEAS
    3. 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.
    4. Leonardo Gambacorta & Giacomo Ricotti & Suresh Sundaresan & Zhenyu Wang, 2017. "The effects of tax on bank liability structure," BIS Working Papers 611, Bank for International Settlements.
    5. 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.
    6. 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.
    7. Felix Bierbrauer, 2013. "Financial Transaction Taxes and Fire Sales," 2013 Meeting Papers 433, Society for Economic Dynamics.
    8. Bierbrauer, Felix, 2014. "Tax incidence for fragile financial markets," Journal of Public Economics, Elsevier, vol. 120(C), pages 107-125.
    9. Cappelletti, Giuseppe & Guazzarotti, Giovanni & Tommasino, Pietro, 2017. "The stock market effects of a securities transaction tax: Quasi-experimental evidence from Italy," Journal of Financial Stability, Elsevier, vol. 31(C), pages 81-92.
    10. Kogler, Michael, 2016. "On the Incidence of Bank Levies: Theory and Evidence," Economics Working Paper Series 1606, University of St. Gallen, School of Economics and Political Science.
    11. 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.

    More about this item


    Corrective taxation; Bank taxation; bank failure; capital ratio; capital requirement; banking; bank owners; regulatory approach;

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