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On the incidence of bank levies: theory and evidence


In the aftermath of the financial crisis, several European countries have introduced levies on bank liabilities. The aim is to compensate taxpayers for the provision of bailouts and guarantees and to internalize the fiscal costs of future banking crises. This paper studies the tax incidence: Building on the Monti–Klein model, we predict that banks shift the tax mainly to borrowers by raising lending rates and that deposit rates may increase because deposits are partly exempt. Bank-level evidence from 23 EU countries (2007–2013) shows that the levy indeed increases the lending and the deposit rate as well as the net interest margin. Banks adjust differently to this tax depending on the composition of their balance sheets: In line with theory, especially those banks with a high loan-to-deposit ratio raise the interest rates. Market concentration and the capital structure influence the magnitude of the pass-through, which is stronger in concentrated markets and weaker in case of banks with a high regulatory capital ratio.

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  1. ‘Financial Sector Taxation. The IMF’s Report to the G-20 and Background Material,’ 2010.

  2. Gross and net positions coincide either if loans are subject to capital requirements or liabilities are taxed; see Online Appendix A.3.

  3. If they are not exempt, the levy will affect the respective interest rate \(r_{S}\) in parallel to the interest rate on uninsured deposits \(r_{D}\).

  4. We focus on a small tax change such that the regulatory constraint still binds (i.e., \(\rho >r+\tau +d\tau \)). Otherwise, banks would substitute equity for liabilities.

  5. The latter follows from an Envelope argument: \(\frac{\partial \pi _i}{\partial \tau }=-[(1-k)l_{i}-s_{i}]<0\).

  6. One unit of deposits creates \(1/(1-k)\) units of assets, which earn \(r/(1-k)\) on the money market. To satisfy capital standards, the bank must raise \(k/(1-k)\) units of equity with return \(\rho \).

  7. This de facto captures the (post-)crisis period 2008–2013 as bank-level stock variables are lagged.

  8. This holds a fortiori if a higher lending rate as a result of the levy increases risk taking and defaults in the sense of Stiglitz and Weiss (1981).

  9. Table 15 in Appendix A.2 provides an overview about the marginal tax rates.

  10. For example, consider a bank with large equity losses during the financial crisis. It will deleverage, thereby raising the lending rate. At the same time, the smaller equity renders such a bank more exposed to the levy (as equity is exempt) based on a pre-introduction but post-crisis balance sheet (e.g., 2009, 2010). This might still bias the estimates although the predicted tax exposure is undistorted by any behavioral responses to the levy itself.

  11. Therefore, the main effects cannot be estimated because they are absorbed by the bank fixed effect. The contemporaneous effect is captured by the standard control variable \(\hbox {HHI}\); if the branch density is used in (13), we replace the contemporaneous control variable accordingly.

  12. Information from central banks for Bulgaria, Cyprus, Latvia, Lithuania, Malta, and Romania

  13. This might give rise to survivorship bias if banks exit because they cannot pass through the levy. However, this is highly unlikely in the short run as most countries introduced the levy not earlier than 2011 and the sample includes just two follow-up periods.

  14. The taxable liabilities are approximated as follows:

    • AT: Total liabilities—insured deposits

    • DE: Total liabilities—customer deposits

    • NL: Total liabilities and equity—insured deposits—regulatory capital, if regulatory capital not reported, it is replaced by common equity or total equity

    • UK: Total liabilities and equity—insured deposits—Tier 1 equity; if Tier 1 equity is not reported, it is replaced by common equity or total equity

    We use the current-year balance sheet, only for Austria, we use the 2010 balance sheet.

    Insured deposits are computed by multiplying a bank’s customer deposits by the coverage ratio, which equals the volume share of insured deposits at the country level. Data on the coverage ratio are from the Joint Research Centre of the European Commission and are available for the years 2007, 2011, 2012 (reports ‘JRC Report under Article 12 of Directive 94/19/EC as amended by Directive 2009/14/EC,’ 2010, and ‘Updated Estimates for EU eligible and covered deposits,’ 2014). For the years 2010 and 2013, we use the values of the next or previous year.

  15. Officially, it was enacted in October 2009 and formally introduced on 30 December, and the first payment was already due in 2009. Following Devereux et al. (2015), banks are considered unaffected in 2009 because many had drawn up the balance sheet when it was enacted.

  16. For example, we obtain comparable estimates when excluding countries that adopt the levy after 2011 to address anticipation concerns; excluding the largest country from the sample yields qualitatively similar estimates for IIL and IED but insignificant ones for NIM (see Table B.4).

  17. Conditional that banks are effectively taxed, i.e., \(\hbox {Levy}2=1\)

  18. The capital requirement k is defined in terms of risk-weighted assets, on which data are not available for all banks in the sample. Given the small value of k especially if expressed in terms of total assets, 100% appears a suitable approximation that is only slightly smaller than the theoretical cutoff.

  19. The full sample distribution is less meaningful for a cross-country comparison as fragmented markets are overrepresented due to the large number of German banks.


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I thank Michael Devereux, Christian Keuschnigg, Stefan Legge, Gyöngyi Lóránth, Martin Simmler, seminar participants at University of St. Gallen, and participants at the RGS Doctoral Conference in Economics 2015 in Essen, the Doctoral Meeting at Oxford University Centre for Business Taxation, the Royal Economic Society 2016 Annual Conference, and the Public Economics Research Seminar at Ifo Institute in Munich for helpful discussions and suggestions. I am very grateful for comments from two anonymous referees. Financial support of the Swiss National Science Foundation (Projects no. \(100018{\_}146685/1\) and no. P2SGP\(1{\_}171927\)) is gratefully acknowledged.

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Correspondence to Michael Kogler.

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A Appendix

A Appendix

1.1 A.1 Proofs

Proof of Proposition 1

We differentiate the first-order conditions with respect to loans and insured deposits in (4). For loans L, we get

$$\begin{aligned} \frac{\partial L}{\partial \tau }=\frac{1-k}{r_L^{\prime }(L)\left( 1-\frac{1}{N\varepsilon _L}\right) }<0. \end{aligned}$$

Noting \(r_L=r_L(L)\) and \(r_L^{\prime }(L)<0\), the lending rate increases (see (5)). The effect of N, \(\varepsilon _L\) and k is negative by inspection and reduces the increase in \(r_{L}\).

Differentiating the first-order condition with respect to insured deposits S yields

$$\begin{aligned} \frac{\partial S}{\partial \tau }= \frac{1}{r_{S}^{\prime }(S)\left( 1+\frac{1}{N\varepsilon _S}\right) }>0. \end{aligned}$$

Again, noting \(r_{S}=r_{S}(S)\) and \(r_{S}^{\prime }(S)>0\), we get (6). The effect of N and \(\varepsilon _{S}\) on \(r_{S}\) is positive and reinforces the increase in S and \(r_{S}\). \(\square \)

Proof of Proposition 2

To get the profit maximization problem (7), we substitute \(T_i=\tau d_i\), \(e_i=k(l_i-m_i)\) and \(l_i+m_i=s_{i}+d_i+e_i\) into (1). The second and third equation jointly imply \(m_i=l_i-(s_{i}+d_i)/(1-k)\) and \(e_i=k(s_{i}+d_i)/(1-k)\).

$$\begin{aligned} \pi _i= & {} (1+r_{L})l_{i}-(1+r)\left[ l_i-\frac{s_{i}+d_i}{1-k}\right] -(1+r_S)s_{i}]\\&-(1+r_D)d_{i}-(1+\rho )\frac{k(s_{i}+d_i)}{1-k}.\nonumber \end{aligned}$$

By rearranging and using the definition \({\tilde{r}}\), one obtains equation (7).

We differentiate the first-order condition for uninsured deposits D in (8):

$$\begin{aligned} \frac{\partial D}{\partial \tau }=-\frac{1}{r_L^{\prime }(L)\left( 1+\frac{1}{N\varepsilon _D}\right) }<0. \end{aligned}$$

Using \(r_D=r_D(D)\) with \(r_D^{\prime }(D)>0\) yields (9). The effect of N and \(\varepsilon _{D}\) on \(r_{D}\) is negative by inspection and reinforces the effect. \(\square \)

Proof of Proposition 3

In the main scenario \(m_{i}\ge 0\), the NIM defined by the first part of (11) responds to the levy \(\tau \) according to:

$$\begin{aligned} \frac{\partial NIM}{\partial \tau }=\frac{\partial r_L}{\partial \tau }-\frac{(r-r_D)D+(r-r_{S})S}{L^2}\frac{\partial L}{\partial \tau }+\frac{r-r_{S}-r_{S}^{\prime }(S) S}{L}\frac{\partial S}{\partial \tau }.\qquad \end{aligned}$$

We substitute (5) as well as (A.1) and (A.2) for the partial derivatives of lending rate, loans and insured deposits and use \(r-r_{S}=r_{S}/(N\varepsilon _{S})-\tau \) implied by the third equation of (4). We evaluate this response at an initial tax rate \(\tau =0\) to capture the effect of introducing the levy:

$$\begin{aligned} \begin{aligned} \frac{\partial NIM}{\partial \tau }&= \frac{1-k}{1-\frac{1}{N\varepsilon _L}}\left[ 1-\frac{(r-r_D)D+(r-r_{S})S}{r_L^{\prime }(L)L^2}\right] -\frac{1}{1+\frac{1}{N\varepsilon _{S}}}\left( 1-\frac{1}{N}\right) \frac{S}{L}\\&=\frac{1-k}{1-\frac{1}{N\varepsilon _L}}\left[ 1+\frac{\varepsilon _{L}}{r_{L}}\frac{(r-r_D)D+(r-r_{S})S}{L}\right] -\frac{1}{1+\frac{1}{N\varepsilon _{S}}}\left( 1-\frac{1}{N}\right) \frac{S}{L}. \end{aligned} \end{aligned}$$

Noting \(S=L-D-M-E\) such that \(S/L=1-k-(D+M)/L< 1-k\), the effect is positive.

In the alternative scenario \(m_{i}<0\), the NIM defined by the second part of (11) responds according to

$$\begin{aligned} \begin{aligned} \frac{\partial NIM}{\partial \tau }=&-\frac{(1-k)[(r-r_{L})L+({\tilde{r}}-r_D)D+({\tilde{r}}-r_{S})S]}{(D+S)^2}\frac{\partial D}{\partial \tau }\\&+\frac{(1-k)[{\tilde{r}}-r_{D}-r_{D}^{\prime }(D) D]}{D+S}\frac{\partial D}{\partial \tau }. \end{aligned} \end{aligned}$$

Using the definition of NIM as well as \({\tilde{r}}-r_{D}=r_{D}/(N\varepsilon _{D})-\tau \) implied by (8), we evaluate this effect at \(\tau =0\):

$$\begin{aligned} \begin{aligned} \frac{\partial NIM}{\partial \tau }=-\left[ NIM+\frac{(1-k)r_{D}}{\varepsilon _D}\left( 1-\frac{1}{N}\right) \right] \frac{1}{D+S}\frac{\partial D}{\partial \tau }>0. \end{aligned} \end{aligned}$$

Noting \(\partial D/\partial \tau <0\) in (9), introducing a levy unambiguously raises the NIM. \(\square \)

1.2 A.2 Data information, measurement, and summary statistics

See Tables 13, 14, 15, 16.

Table 13 Definition of variables
Table 14 Sample composition by Country
Table 15 Bank-level tax exposure
Table 16 Summary statistics

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Kogler, M. On the incidence of bank levies: theory and evidence. Int Tax Public Finance 26, 677–718 (2019).

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  • Bank levy
  • Taxation of banks
  • Tax incidence
  • Pigovian taxes

JEL Classification

  • G21
  • G28
  • H22