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Can taxes tame the banks? Evidence from European bank levies

  • Michael P. Devereux

    (Centre for Business Taxation, Oxford University)

  • Niels Johannesen

    (Copenhagen University)

  • John Vella

    (Centre for Business Taxation, Oxford University)

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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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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