Bank levies can make bank balance sheets more resilient, but high corporate tax rates dampen the effect

Following the global financial crisis of 2008/2009, many European countries introduced bank levies to enable financial institutions to share in the costs of future banking crises via resolution and restructuring funds. Simultaneously, bank levies can set an incentive for banks to reduce their leverage, thereby achieving a more stable capital structure. Using information from banks’ balance sheets, this report investigates to what extent bank levies have reduced leverage ratios and what role the corporate income tax rate plays in this. Preferential tax treatment of debt capital means that higher corporate tax rates favor a higher leverage ratio. The empirical findings show that banks in countries with a bank levy on bank debt have lower leverage and thus higher capital buffers than banks in countries without a levy. The higher the corporate tax rate, however, the less bank levies reduce leverage. To ensure regulatory levies are effective, how they interact with other taxes must be taken into account.
DIW Weekly Report