Taxing banks: An evaluation of the German bank levy

Abstract

Reproduction permitted only if source is stated.ISBN 978-3-95729-094-6 (Printversion) Non-technical summary Research QuestionBank distress can have severe negative consequences for public finances, which became obvious during the latest financial crisis. Bank levies can be one instrument to internalize the costs of bank distress. As they are not a common instrument in policymakers' toolkits, it is important to examine the consequences of their introduction. We focus on two main questions in the context of the German bank levy: What is the tax burden on different types of banks? How does the levy affect bank behavior? ContributionThis is the first empirical study of the effects of the German bank levy. Moreover, the results not only give insights at the national level but are able to inform the debate about the design of the contribution to the single resolution fund at the European level. ResultsThe descriptive analysis shows that low tax rates and high thresholds for tax exemptions limit the revenues raised through the bank levy. Moreover, systemically important banks are the main contributors. Our empirical regression approach exploits the retrospective nature of the introduction of the bank levy. The details of the tax were made public in 2011, but the bank levy was calculated based on balance sheet data of 2010. This represents an exogenous policy change and allows the effects of the bank levy on bank behavior to be studied in a differencein-difference setting. The results show that the levy has a significant effect on lending and interest rate setting. Banks affected by the levy reduce their loan supply and increase deposit rates. Nichttechnische Zusammenfassung AbstractBank distress can have severe negative consequences for the stability of the financial system, the real economy, and for public finances. Regimes for the restructuring and resolution of banks, financed by bank levies and fiscal backstops, seek to reduce these costs. Bank levies attempt to internalize systemic risk and to increase the costs of leverage. This paper evaluates the effects of the German bank levy implemented in 2011 as part of the German Bank Restructuring Act. Our analysis offers three main insights. First, revenues raised through the bank levy are lower than expected, because of low tax rates and high thresholds for tax exemptions. Second, the bulk of the payments were contributed by large commercial banks and by the central institutions of savings banks and credit unions. Third, for the banks affected by the levy, we find evidence for a reduction in lending and higher deposit rates.

Spillovers of banking regulation: the effect of the German bank levy on the lending rates of regional banks and their local competitors

“…Also, the German and other European bank levies have already been examined in several papers. Buch et al (2016) find that German banks decreased their loan volumes and increased their deposit rates in 2011 if they were subject to the bank levy. They use a difference-in-difference approach which uses banks which were not subject to the levy as the control group.…”

“…As only systematic banks are rescued, there is a tax allowance to relieve smaller banks from the tax burden. Therefore, only about half of the savings banks and 5% of the cooperative banks must pay the bank levy (Buch et al, 2016). We use this feature to study the direct effects of the bank levy as well as the spillover effect to competitors.…”

“…Secondly, even if a bank does not have an annual surplus, a minimum contribution of 5% of the calculated annual contribution has to be paid. For more details we refer to Buch et al (2016).…”

“…In several European countries bank levies have been introduced which finance restructuring and resolution funds for credit institutions and investment firms with the objective to internalize the public fiscal costs of potential bank rescues (IMF, 2010;Perotti & Suarez, 2011). Bank levies work similar to a Pigouvian tax and usually target banks' balance sheet positions which are considered to be risky (Buch et al, 2016). Thereby, a levy also aims to reduce banks' risk positions.…”

Global Taxes and International Taxation: Mirage and Reality

“…Rogoff (2010) suggests that there is no rationale for such a tax if the basic regulatory system is adjusted properly -which in practice might mean imposing something like an FSC. On the other hand, IMF (2010) noted that if inappropriate regulatory policy created substantial rents (unearned incomes) in the financial sector and a country decided to subject such rents to special taxation, a FAT could not only 20 The effects of these levies are only beginning to be understood: see, for instance, a recent analysis of the German bank levy (Buch, Hilberg, and Tonzer 2014). For an example of how complicated some of these taxes may be, take a look at the 252-page official manual issued at the time of the introduction of the UK bank levy (available at http://www.hmrc.gov.uk/budget-updates/autumn-tax/bank-levy-manual.pdf).…”